[Regulations Raising Prices]③ "Selling the Same Tteokbokki... Tteokbangatgan Pays More Taxes Than Restaurants"

Input Tax Credit Rates Differentiated for 'Manufacturing' and 'Restaurant' Sectors
Price Increase of Rice Cakes for Tteokbokki Unavoidable Due to Tax Burden
Food Manufacturing Industry Calls for Resolving Fairness Issues and Raising Credit Rates

#. Yoo, CEO of a company in Icheon-si, Gyeonggi Province, that processes rice and wheat flour to manufacture rice cakes for tteokbokki. Yoo is always distressed twice a year when he has to pay value-added tax (VAT). This is because agricultural and livestock products purchased as raw materials are tax-exempt items, so there is little amount to deduct from the National Tax Service. Yoo feels a heavy burden from the lump-sum VAT settlement, especially as raw material prices continue to rise. He lamented that he has no choice but to raise the price of tteokbokki rice cakes sold to restaurants and marts.

For business owners like Yoo who mainly use agricultural and livestock products as raw materials, there is a system called the "Presumptive Input Tax Credit." When a business owner purchases raw materials, they pay VAT as a consumer. When they make products from these raw materials and sell them, the consumers who buy these products pay VAT accordingly. Usually, when a business owner pays VAT to the National Tax Service, they can deduct the VAT paid at the time of raw material purchase. However, since tax-exempt items like agricultural and livestock products do not have VAT, there is no amount to deduct. The Presumptive Input Tax Credit system recognizes that a certain amount of VAT has been paid even in such cases, reducing the tax burden. It is a measure to protect the agricultural and livestock industry and small business owners.

The Presumptive Input Tax Credit is calculated by multiplying a certain deduction limit and deduction rate by the purchase amount of tax-exempt items. However, the deduction rate varies depending on the industry, such as food manufacturing and restaurant businesses. For food manufacturing, including rice cake mills, confectionery shops, rice polishing, and flour milling, the rate is 5.66%; for small and medium enterprises and sole proprietors, it is 3.84%; and for other businesses, it is 1.96%. In the restaurant industry, operators of taxable entertainment venues have a rate of 1.96%, general restaurants have 7.4% (8.25% for taxable bases under 200 million KRW), and other businesses have 5.66%. The deduction rate for restaurants is relatively higher than that for manufacturing.

Food manufacturers collectively argue that the differential application of deduction rates between food manufacturing and restaurant industries is unfair. A representative of a rice processing company said, "We are the same self-employed business owners making food from the same raw materials and selling to consumers, so it is unreasonable to give more tax benefits to the restaurant industry." He appealed, "It is already difficult to operate manufacturing due to labor shortages and aging facilities; the government should help." As of 2019, the total amount of presumptive input tax credits was 2.8974 trillion KRW, of which the restaurant industry accounted for 2.5138 trillion KRW, or 86.7%.

Jin-i-ne Tteokbokki, Gangdong-gu, Seoul

There is also an opinion that manufacturing should be supported more, especially as rice consumption continues to decline. An official from the Korea Rice Processing Association explained, "With the decrease in rice consumption as table rice, many rice quantities need to be converted into processed foods. Tax support for manufacturers processing agricultural products including rice is necessary to expand rice consumption," adding, "Now is the optimal time as K-food such as rice snacks and Makgeolli is spreading." In 2021, exports of Korean rice processed foods to the United States increased by 21% from the previous year to 70.36 million USD (about 97.8 billion KRW). Exports to Japan rose 13% to 19.4 million USD (2.69 billion KRW).

The Yoon Suk-yeol administration partially accepted industry demands to reform the presumptive input tax credit during the transition committee period last year. In July of the same year, without changing the deduction rate, the deduction limit was raised by 10 percentage points from 40-65% of the taxable base to 50-75%. The application period is until the end of this year. An industry official said, "Most small and micro self-employed businesses have sales below the deduction limit and thus received no benefits," adding, "Raising the deduction rate rather than the deduction limit would reduce costs for large corporations, SMEs, and small business owners alike and help control prices."