Resolution on the 2021 Tax Expenditure Basic Plan at the State Council Meeting
[Sejong=Asia Economy Reporter Kim Hyunjung] As the government expands tax support for COVID-19 response and economic recovery, the amount of national tax exemptions and reductions is expected to approach 57 trillion won this year, marking an all-time high. The national tax exemption rate is expected to exceed the legal limit for the third consecutive year since 2019.
The Ministry of Economy and Finance announced on the 30th that the '2021 Basic Plan for Tax Expenditure' containing these details was approved at the Cabinet meeting. Tax expenditure refers to the government not collecting taxes that should be collected, and since it produces effects similar to actual fiscal spending, the Minister of Economy and Finance prepares the basic plan annually in accordance with the Restriction of Special Taxation Act.
According to the announcement, the amount of national tax exemptions and reductions this year is projected to be 56.8 trillion won, with total national tax revenue expected at 300.5 trillion won. The tax exemption rate relative to the revenue budget is forecasted at 15.9%, which exceeds the legal limit for the third consecutive year since 2019. The National Finance Act (Article 88) stipulates that the national tax exemption rate should be below the exemption limit (the average national tax exemption rate of the previous three years plus 0.5 percentage points). If this legal limit is actually exceeded this year, it will mark the fifth time in history, following the global financial crisis years of 2008 and 2009, and the economic downturn years of 2019 and 2020. The Moon Jae-in administration is the first to exceed the legal limit three times during its term.
The Ministry of Economy and Finance stated, "We will operate tax expenditures focusing on supporting vulnerable groups and revitalizing the economy, while actively reorganizing unnecessary tax exemptions and reductions to strengthen efforts to comply with the exemption limit," adding, "We will faithfully implement preliminary feasibility studies and in-depth evaluations, and actively reflect the evaluation results in the tax law amendment proposals."
Last year, the amount of national tax exemptions and reductions was 53.9 trillion won, with the exemption rate estimated at around 15.4%. This was due to strengthening the tax expenditure functions aimed at supporting small business owners and SMEs, investment, and job creation to boost economic vitality. Last year, the government promoted measures such as expanding the scope of VAT reductions for small individual business owners, tax credits for voluntary rent reductions, temporary increases in credit card deduction rates, and the establishment of an integrated investment tax credit.
Meanwhile, the Ministry of Economy and Finance plans to notify each ministry of the basic plan by the end of this month, receive tax expenditure evaluation reports and proposals from each ministry by the end of next month, and reflect them in this year's tax law amendment proposals after consultations.
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