Surplus Tax Revenue 'Drops?' Amid COVID Rebound... VAT Impact Unavoidable

VAT Revenue May Decrease Due to the Fourth Wave of COVID-19 Pandemic

On the first day of Level 4 social distancing in the Seoul metropolitan area on the 12th, the streets of Hongdae in Mapo-gu, Seoul, are quieter than usual. Under the Level 4 measures, gatherings of up to four people are allowed before 6 p.m., and only up to two people are allowed afterward. Photo by Moon Honam munonam@

[Asia Economy Reporter Jang Sehee] There are forecasts that the current tax revenue boom could be interrupted due to the fourth wave of COVID-19. This is based on the judgment that value-added tax (VAT), one of the three major tax bases, could significantly decrease as sales decline due to strengthened social distancing measures.

The Ministry of Economy and Finance, the fiscal authority, also acknowledges that tax revenue trends could change at any time depending on the COVID-19 situation. A government official stated on the 25th, "Since group gatherings have decreased due to social distancing, VAT is directly affected in the first instance," adding, "This could impact the scheduled VAT filing in October." Furthermore, if COVID-19 continues through the second half of this year, tax revenue could be hit as far as January next year.

Although the Ministry of Economy and Finance projected total excess tax revenue for this year at 31.5 trillion KRW during the second supplementary budget, the possibility of a larger decrease has increased. The VAT revenue forecast is expected to increase by 2.6943 trillion KRW compared to the first supplementary budget (66.6531 trillion KRW).

Looking at recent monthly trends, VAT recorded ▲17.5 trillion KRW in January ▲-1.3 trillion KRW in February ▲1.4 trillion KRW in March ▲16.8 trillion KRW in April ▲-0.8 trillion KRW in May. Negative tax revenue results in February and May were due to a large amount of refunds for filings from the previous month.

VAT payment months are January, April, July, and October, with business from July to September this year to be paid in October. VAT is a type of consumption tax levied each time value is added during the production or distribution process of products. If sales of self-employed small business owners decline, tax revenue naturally decreases.

VAT, the 2nd largest tax revenue source: "If consumption does not occur, it will drastically decrease"

As VAT, which ranks second in total tax revenue, decreases, it is expected to have a significant impact on overall tax revenue. According to national tax statistics, last year VAT collected 64.9 trillion KRW, second only to income tax (98.2 trillion KRW), while corporate tax collected 55.5 trillion KRW. Given its large share among all tax categories, its influence on tax revenue trends is expected to be substantial.

On the other hand, corporate tax is also affected by external factors, and income tax is largely influenced by capital gains tax, so the relative impact is expected to be less severe.

Regarding this, Professor Hong Woo-hyung of Hansung University’s Department of Economics explained, "Since VAT itself is based on sales, if consumption does not occur, VAT inevitably decreases," adding, "In the case of liquor tax, which is based on volume rather than sales, the impact may not be as severe."