Korea to ease VAT criteria, reduce tax burden

South Korea is looking to ease the value-added tax (VAT) criteria to reduce the tax burden on self-employed and small businesses.

Small businesses (simplified taxpayers) are subject to a lower tax rate of 1.5 to 4 percent, while general businesses are typically subject to a 10 percent tax rate.

According to government sources on Sunday, the government is considering revising the VAT enforcement decree to raise the annual sales threshold for simplified taxpayers from 80 million won ($60,848) to 100 million won. Currently, small entrepreneurs with annual sales between 48 million won and 80 million won qualify as simplified taxpayers and are subject to the lower tax rate of 1.5 to 4 percent instead of the standard 10 percent rate.

The government can raise the threshold for simplified taxpayers to up to 104 million won with an amendment to the decree.

If the government finalizes this revision, it will be the first time in four years that the government has further relaxed the threshold after raising it from 48 million won to 80 million won in 2020 to reduce the impact of the Covid-19 pandemic, potentially increasing the number of beneficiaries among the 2 million simplified taxpayers (based on 2022 tax returns).

The government announced its 2024 economic policy direction on January 4, 2024, saying that it would raise the threshold for simplified taxpayers in the first quarter of the year as it takes the recent inflation rate into account. The consumer price index rose by as much as 11.6 percent from 2020 to 2023.

As a follow-up measure, the government plans to prepare a revised VAT enforcement decree as early as the middle of January 2024.

According to academic studies, the increased threshold for simplified taxpayers during the pandemic had a significant income support effect. “Given that small business owners, who were most affected by Covid-19 economically, are mainly concentrated in the middle and low-income groups, expanding the scope of simplified taxpayers, which has been implemented since 2021, can be seen as having an income support effect on these groups,” Professor Sung Myung-jae of Hongik University said in a paper published in the ‘Budget Policy Research’ in 2022.

But there is a possibility that the sales threshold may be adjusted due to the recent sharp decline in tax revenues.

According to a report by the National Assembly Budget Office on progress and highlights of the 2020 tax law revision, when the simplified tax threshold was raised to 80 million won in 2020, tax revenue was expected to decline by 1.12 trillion won, or an annual average of 224.5 billion won, from 2021 to 2025.