Government Extends Passenger Car Individual Consumption Tax Reduction for 6 Months... Industry Says "Urgent Issue Resolved" (Comprehensive)

Emergency Economic Central Countermeasures Headquarters Meeting

Hong Nam-gi "Cost-saving measures for consumers purchasing this year and shipping next year"

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, presides over and speaks at the Central Emergency Economic Countermeasures Headquarters meeting at the Government Seoul Office Building on the 23rd. (Photo by Ministry of Economy and Finance)

[Sejong=Asia Economy Reporters Moon Chaeseok and Lee Gimin] The government has decided to extend the deadline for the individual consumption tax reduction on passenger cars, which was scheduled to end at the end of the year, by six months. This decision was made based on the judgment that more consumers might not fully benefit from the tax reduction due to delayed vehicle deliveries caused by the semiconductor shortage. The industry breathed a sigh of relief, saying that this measure has put out the urgent fire.

On the 23rd, Hong Nam-ki, Deputy Prime Minister and Minister of Strategy and Finance, chaired the Emergency Economic Central Countermeasures Headquarters meeting at the Government Seoul Office and announced, "The individual consumption tax reduction on passenger cars will be extended until June next year."

When purchasing a passenger car, the individual consumption tax is applied along with an education tax (30% of the individual consumption tax amount) and value-added tax. The government had previously reduced the individual consumption tax on passenger cars by 30%, from 5% to 3.5%, for one and a half years from July 2018 to the end of 2019. In the first half of last year, when COVID-19 spread, the tax was lowered to 1.5%, and in the second half, the reduction rate was restored to 30%. This year, the government extended the 30% tax reduction for six months until June and decided to maintain the 30% individual consumption tax reduction policy until the end of the year.

The main reason the government pulled out the card to extend the tax reduction is the increase in consumers who could not benefit from the tax cut due to delayed vehicle deliveries caused by the semiconductor shortage. Deputy Prime Minister Hong said, "We will take measures to reduce the purchase cost for consumers who bought vehicles this year but whose vehicles will be delivered in the first half of next year."

The Hyundai Motor Asan plant was shut down in April due to the ongoing shortage of automotive semiconductors. (Image source=Yonhap News)

The industry is breathing a sigh of relief, saying that the government's recent measure has put out the urgent fire. This is in the context of alleviating concerns about customer inequality and declining domestic sales caused by vehicle delivery delays. Kim Juhong, Head of Policy Planning at the Korea Automobile Manufacturers Association, said regarding the government's announcement, "Automakers had finalized production plans for six months to a year in advance, but consumers would have canceled if the vehicles contracted within this year were not delivered," adding, "It is fortunate that the individual consumption tax reduction has been extended." He added, "Although the semiconductor supply shortage will continue next year, the tax reduction will also help stimulate domestic demand."

There were also calls to gradually abolish the individual consumption tax on passenger cars. The individual consumption tax on products such as air conditioners and refrigerators, which were once considered luxury goods, was abolished in 2015, and maintaining the tax on passenger cars is seen as inconsistent with this trend. Professor Kim Pilsoo of the Department of Automotive Studies at Daelim University said, "Passenger cars are no longer considered luxury goods but everyday items," and pointed out, "Applying a concept that is decades old is problematic, and it is appropriate to extend the tax reduction while reforming the system."