Korea to end individual consumption tax cut on passenger cars on June 30

Hyundai Motor co.’s Grandeur sedan [Photo provided by Hundai Motor]

The South Korean government announced Thursday that it will end the individual consumption tax cut for automobiles as planned on June 30, returning the rate to 5 percent from 3.5 percent.

The move has sparked market confusion as the announcement was made just one day after it announced a reduction in the tax base for domestic cars.

The Ministry of Economy and Finance said that it will end the flexible tax rate for car consumption taxes on June 30. The tax rate, as a result, will be 5 percent from July 1.

With the outbreak of the pandemic that led to an economic contraction in 2020, the government lowered the individual consumption tax rate for passenger cars by 70 percent to as low as 1.5 percent of the factory price from 5 percent between March and June the same year.

In July 2020, the tax cut was reduced by 30 percent to 3.5 percent, which was extended five times and continued for the third year.

“Considering that the auto industry is doing well and that the consumption environment is improving, we saw that the purpose of the policy to boost domestic demand during the pandemic has been served,” the ministry said.

The problem, however, is that the announcement of the Ministry of Economy was made a day after the National Tax Service, an umbrella organization of the ministry, decided to cut the tax base for domestic cars by 18 percent.

The National Tax Service said Wednesday that the “criteria for tax levies for domestic cars will be lowered by 18 percent from July” and that “taxes imposed on domestic cars will be lowered along with the car consumer price as the tax calculation method for domestic cars is improved.”

As the reduction in tax base was announced first before the individual consumption tax rate increase was known to the public, consumers thought that their tax payment including the car consumption tax will be reduced from July.

It has been shown later, however, that the tax payment would rather increase by hundreds of thousands of won as the Ministry of Economy announced the car tax hike to 5 percent from 3.5 percent on the next day.

The amount of individual consumption tax is calculated by multiplying the tax base by the individual consumption tax rate, which means the tax payment will increase even if the tax base is lowered and only the individual tax rate is raised.

When purchasing a Hyundai Grandeur sedan with a factory price of 42 million won ($32,307), the tax payment increases by 360,000 won from July after reflecting the combined changes in tax base and individual consumption tax rate.

This has raised criticism that the government has caused confusion among car buyers by separately announcing the changes in two key elements that determine the amount of car individual consumption taxes.

An individual consumption tax is paid when a vehicle is delivered and registered. Three taxes come with purchasing a car - 5 percent of the vehicle supply price, education tax that is 30 percent of the individual consumption tax, and 10 percent value-added tax on the total supply price plus the individual consumption tax and education tax.

The education tax and value-added tax are linked to the individual consumption tax, and the tax payment varies greatly depending on the individual consumption tax rate.

The individual consumption tax rate was cut by 30 percent from 5 percent to 3.5 percent when the domestic market remained stagnant right after the global financial crisis between January and June 2009, and was again temporarily reduced between September and December 2012, September 2015 and June 2016, and July 2018 and December 2019.

The individual consumption tax rate was restored to 5 percent in 2020 but was again lowered to 3.5 percent in March the same year to promote consumption that was hit hard by Covid-19.