Not Reflected in Next Year's Revenue Budget, Burden of Soaring Installment Interest Rates
Combining Excise Tax and Interest Rate Hikes Results in GV80 Price Increase of 10 Million Won
(Photo by Asia Economy)
[Asia Economy Reporter Kiho Sung] Attention is focused on whether the individual consumption tax (ICT) reduction policy for passenger cars, which has continued for the past four and a half years, will be extended next year. Due to the sharp rise in car installment interest rates, the actual amount consumers have to pay when purchasing a car has already increased significantly. Considering the disappearance of the ICT reduction effect and the interest rate hike, the price of luxury cars like the Genesis GV80 will soar by more than 10 million KRW compared to the beginning of this year.
According to the industry on the 14th, the Ministry of Economy and Finance is reported not to have reflected the ICT reduction for passenger cars in next year's revenue budget. This means that the tax revenue forecast was made on the premise of restoring the ICT to the normal rate (5%) starting next year.
The ICT reduction for passenger cars has been continuously extended every six months since July 2018. The currently applied ICT reduction (from 5% to 3.5%) was originally scheduled to expire in July this year but was extended for six months until the end of the year as part of the government's 'Livelihood Stabilization Measures.' In other words, if the government does not take any further extension measures, the original ICT rate of 5% will apply from January 1 next year.
In this case, the burden on consumers will increase further. Under tax law, consumers must pay a 5% ICT when purchasing a passenger car. In addition, an education tax of 30% of the ICT and a value-added tax of 10% on the combined amount of ICT and education tax are imposed. For example, when purchasing a passenger car with a factory price of 20 million KRW, reducing the ICT from 5% to 3.5% results in a tax benefit of about 430,000 KRW. The higher the vehicle price, the greater the effect of the ICT reduction. A 30 million KRW passenger car received a tax benefit of about 640,000 KRW. In the case of the 75 million KRW GV80, if the ICT reduction ends, consumers will have to pay an additional 1.61 million KRW in taxes.
Moreover, the soaring interest rates are also driving up car prices. The car installment interest rate, which was 3% at the beginning of the year, is now at the 7-10% level as of early this month. For a 65 million KRW GV80, if paid in 36 installments at a 3% interest rate, the actual interest paid is 3.51 million KRW, but applying the increased 10% interest rate raises it sharply to about 12.12 million KRW. Considering the end of the ICT reduction as well, the car price effectively increases by about 10.2 million KRW.
Within the industry, considering the shortage of automotive parts supply and the economic recession, there is a sentiment that the ICT reduction period should be extended. An industry official pointed out, "As the waiting period for new cars is prolonged, many consumers who want to purchase a car before the ICT reduction ends cannot do so," and added, "The possibility of a sharp decline in vehicle demand due to next year's economic downturn should also be taken into account."
On the other hand, there are also forecasts that extending the ICT reduction will not be easy. Professor Pilsoo Kim of Daelim University's Department of Automotive Studies said, "Currently, the waiting period for new cars is long, so even if the ICT reduction is extended, not many consumers will benefit," and added, "Because of this, the government may judge that the effect of extending the ICT reduction is not significant."
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