Early 30% purchase tax cut to drive spending

The Korean government has announced an immediate 30 percent cut in the consumption tax on cars, home appliances and some luxury items in a bid to spur consumer spending.

The so-called individual consumption tax, which now ranges between 5 and 7 percent, will be cut to a range from 3.5 to 4.9 percent, depending on the value of the item.

The tax is levied on items including automobiles, large-size home appliances, royal jelly, scented candles and even deer antlers - regarded as an expensive healthy food in Korea.

Taxation will also be eased on several luxury items, which is currently levied on items exceeding 2 million won ($1,680) in retail price. This includes items such as furniture, cameras, watches, luxury handbags, fur, jewelry, and carpets. The minimum retail price before the tax kicks in is currently 2 million won, but it will be raised 20 percent to any amount exceeding 5 million won.

Under the Ministry of Strategy and Finance’s calculation, the biggest effect will be apparent in the automobile industry. The tax on a Hyundai Sonata 2.0 Smart sedan, a popular model in Korea that costs about 25 million won, will be cut by about 500,000 won from the current 1.6 million won in taxes.

In July, the Finance Ministry announced an end to the individual consumption tax starting next year, as part of its 2016 tax revision plan.

However, the Finance Ministry decided not to wait until next year and cut the tax immediately, as the latest data shows slow domestic consumption, despite an end to the Middle East respiratory syndrome outbreak, and concerns over protracted growth from the recent financial crisis in China.

Data from the Bank of Korea showed Wednesday that the composite consumer sentiment index rose two basis points to 102 in August, the same in January, slowly rebounding from 99 in June.

Some critics question the effectiveness of the cut, saying the impact would not be significant enough to salvage the sagging consumption. Additionally, many items affected are luxury goods consumed by wealthy people.

“The easing rule on luxury items, such as fur and luxury handbags, to 5 million won is absurd,” said Ahn Chang-nam, a taxation professor at Kangnam University in a radio interview. “Most of the luxury items are consumed by wealthy people, and regardless of abolishing the taxes, they will purchase them.”

Choi Won-seok, a professor at the Department of Science in Taxation at the University of Seoul, said the real reason for the tax cut was because the government does not raise much tax from luxury items.

“In fact, compared to other taxes, the revenue from the individual consumption tax has been insignificant,” Choi said. “The ratio of the tax to contribute to total tax revenue is very slight, as it is imposed on specific items only.”

BY KIM HEE-JIN [kim.heejin@joongang.co.kr]