[Viewpoint] Tax cheating using cash

A few days ago, I visited an electronics outlet in Guui-dong, Seoul, to buy a digital voice recorder. After deciding on the product, I asked how much it was, and the seller told me “It will be 190,000 won [$170.63] if you pay with a credit card and 170,000 won if you pay in cash.” I happened to have enough cash in my wallet. Feeling happy about the 20,000 won discount, I bought the recorder and boarded the subway to return home. But soon, I felt irritated for having fallen into the temptation of a discount for a cash purchase.

Later, I told a friend about my experience, and he said I was overreacting. He then told me his story about a business trip to Donghae, Gangwon. A motel owner told him that it would be 30,000 won for a night when paid in cash, and 33,000 won by credit card. As he politely pointed out that such offerings were illegal, the owner replied, “Then, go sleep somewhere else.”

It is prohibited by law to discriminate against credit card users. Violations can be punished by up to one year in prison or a fine of up to 10 million won. But actual punishments are rare, because it’s like “drawing a sword to kill a mosquito.”

Since its debut 30 years ago, credit cards have become a necessity in Korea. They can be used not only in mom-and-pop stores but also for the bus, subway and taxis. But there are still quite a lot of stores that apply different prices for cash and credit card payments. And many probably understand that the discount for a cash payment is given under the condition that no receipt is provided.

The seller normally offers a discount of about 10 percent. The amount is roughly the value added tax to be paid to the tax agency. Instead of paying the tax, the customer gets a discount. In return, the seller will omit the sale when reporting income tax, enjoying the benefit of a tax reduction. The seller can also save the 4.5 percent fee paid to the credit card companies.

The practice is hard to eradicate because customers enjoy lower prices, while sellers enjoy tax reductions.

The problem, however, is that not only small business operators, but high-income professionals and large companies enjoy such transactions. Some businesses do not even accept credit cards. The tax authorities made a new regulation last April that all clinics, private tutoring institutes and wedding halls must issue receipts for all cash transactions amounting to 300,000 won or more. In addition, a reward was announced for those reporting violations. The reward amount would be 20 percent of the illegal transaction with a ceiling of 3 million won per case and 15 million won in total for each year.

Because the reward was so high, government officials thought that the 1.5 billion won budget would soon run out. But a news report earlier this week showed that the reality was far from expectations.

Only about 10 percent of the reward budget was spent. Customers probably felt more attracted to the instant discount offered by the business operators.

The state-run Korea Institute of Public Finance estimated that the nation’s underground economy was worth 175 trillion won in 2008. That is about 17.1 percent of the gross domestic product. The institute said the underground economy would shrink by 0.12 to 0.13 percentage points if the receipts issued for credit cards and cash payments in relation to the gross domestic product were to grow by 1 percentage point.

“Reinforcing tax investigations is the only way to shrink the underground economy,” said An Jong-seok, head of the institute’s research department.

No matter how high the incentives will be for receiving receipts, they won’t be more attractive than the instant discount offered by sellers when paid in cash.

To this end, it is a wise decision to extend the tax break on credit card spending. In fact, it would be desirable to think about expanding the tax break.

The JoongAng Ilbo recently published a series promoting strict monitoring of tax spending of local governments. Many readers supported the articles, which pointed out the tax money wasted by local governments. Public monitoring of tax spending will be fierce.

At the same time, it is time to think about how customers should deal with stores that evade tax. Colluding with tax evasion is also a dereliction of a taxpayer’s duty. To this end, I will be the first to turn down the temptation of a discount for paying for my next purchase in cash.

*The writer is the JoongAng Ilbo’s senior reporter for industrial news.

By Cha Jin-yong