Government to end special tax cuts for car purchases

Economy

Published: 08 Jun. 2023, 17:15 Updated: 08 Jun. 2023, 17:46

Government to end special tax cuts for car purchases

A consumer browses cars at a Hyundai Motor dealership in central Seoul on Thursday, the day that the government announced an end of special tax cuts on car purchases. [NEWS1]

The Korean government will put an end to a special tax cut on car purchases but lower the tax base on locally produced automobiles amid strong car sales and falling tax revenues.

The consumption tax rate for cars will return to the normal 5 percent from the current 3.5 percent starting next month, according to the Ministry of Economy and Finance on Thursday, translating into higher expenditures for consumers.

To mitigate the impact of higher taxes on cars produced at home, the National Tax Service will slash the tax base of the consumption tax by 18 percent for domestic cars, which means that the 5 percent consumption tax will be levied on the retail price of the purchased cars after subtracting 18 percent of the car's price.

For instance, if a consumer purchases Hyundai’s Grandeur model with a price tag of 42 million won ($322,333), the new tax policy could save the consumer 540,000 won as only 34 million won will be subject to taxation.

The decision, due to come into effect next month, is intended to boost the competitiveness of local car producers like Hyundai Motor and Kia. When reporting to the tax authorities, foreign car manufacturers set the prices of their vehicles far lower than the actual retail prices by taking out expenditures incurred in distribution and other costs.

Therefore, buyers of imported cars can benefit from lower taxes even when the retail prices of the shipped car are the same as the domestically-produced vehicles.

“There have been discrepancies in the tax base between domestic and imported cars,” the Finance Ministry said in a statement.

“To address the unfair levying, the tax base will be the total price minus 18 percent which reflects the distribution and other administrative costs when a manufacturer directly delivers their cars in Korea,” the ministry said.

Still, hybrid and electric vehicles will continue to benefit from lower consumption taxes — or be exempted from the tax altogether — in order to boost the appeal of those car ranges.

People buying the cleaner forms of transportation could be freed from the 5 percent tax unless the tax breaks surpass 1 million won for hybrids and 3 million won for electric vehicles.

With the special tax cut ceasing, the government could reap more tax revenue, helping to reverse this year's dramatic downturn in tax revenue collected so far.

Tax revenues between January and April stood at 134 trillion won, down 33.9 trillion won or 20.2 percent compared to the same period last year, according to the Finance Ministry.

The drop was attributed to lower individual income, corporate and consumption taxes. This represented the greatest yearly difference since the government began collecting the relevant data.

The special tax cut on car purchases was first introduced in In July 2018, with the tax rate cut to 3.5 percent. In 2020, the rate went down to 1.5 percent for half a year at the peak of the pandemic outbreak but returned to 3.5 percent in June 2020 and has remained there since.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]