[Why&Next] VAT Cut Virtually Dead... Growing Crisis Theory on 'Yoon Economic Policy'

Ruling Party's Pledge Policy All-Stop Forecast
Value-Added Tax Rate 10% Legally Specified
Ministry of Economy and Finance "Difficult to Promote" Reluctant

There is growing concern that the major economic pledges that poured out like a flood during the April 10 general election will be blocked in the future legislative process and end up as mere illusions. Within the Yoon Seok-yeol administration, which is trapped in a 'minority ruling party' situation, the promotion of key economic policies requiring legal amendments is effectively being pushed to the back burner. In particular, the pledge to reduce the value-added tax (VAT) rate announced just before the general election by former People Power Party emergency committee chairman Han Dong-hoon is considered effectively scrapped within the government. There is increasing worry that without active cooperation from the opposition following the election defeat, the major policies the government has been driving will struggle to see the light of day.

According to the Presidential Office and the Ministry of Economy and Finance on the 20th, the government and ruling party have settled on the view that it is difficult to pursue measures such as temporarily lowering the current 10% VAT rate to 5% on some essential daily necessities to curb soaring inflation. A senior official from the Presidential Office said, "In a situation where there are significant concerns about reduced tax revenue, it is difficult to push forward policies to lower VAT," adding, "Korea's VAT is a general consumption tax applied uniformly to all goods without rate differentiation, so temporarily lowering it for some items could provoke strong backlash."

Legal Amendments Required to Lower VAT Rate to 5%

Procedural issues also reduce the feasibility of lowering the VAT rate. A Presidential Office official stated, "While the government can increase the number of tax-exempt items by revising enforcement ordinances or rules without legal amendments, many parts require changes to related laws," and pointed out, "In a situation where some argue for VAT rate increases, the pledge to lower it to 5% is practically unlikely." Following the election defeat, with the opposition including the Democratic Party gaining a majority, legal amendments are impossible without opposition cooperation, leading to the perception that the plan is effectively dead.

A key ruling party official said, "After the election defeat, some issues requiring legislation are likely to be deprioritized," and added, "Especially the VAT reduction pledge for livelihood announced by former Chairman Han just before the election was a party pledge but had not been agreed upon with the government, so it is considered impossible to realize due to the election defeat." The official also hinted, "Given that last year's tax revenue shortfall reached 56.4 trillion won, the Ministry of Economy and Finance is currently not reviewing VAT rate reductions." A ministry official also said regarding the VAT rate cut, "It is practically seen as difficult to pursue and no preparations are underway."

President Yoon Suk-yeol is delivering closing remarks at the 2024 National Fiscal Strategy Meeting held at the Government Complex Sejong in Sejong Special Self-Governing City on the 17th. [Image source=Yonhap News]

During the general election, the ruling party pledged to ease the VAT burden to reduce tax pressure on small business owners. Former Chairman Han proposed lowering the VAT on some essential daily necessities from 10% to 5% as a measure against high inflation, and the tax authority, the Ministry of Economy and Finance, had expressed a positive stance toward reviewing this at the time.

Former Chairman Han also pledged to raise the VAT simplified taxpayer threshold from an annual sales of 80 million won to 200 million won. VAT payers are divided into general taxpayers and simplified taxpayers, with simplified taxpayers subject to a lower rate of 1.5% to 4.0% compared to the general taxpayer rate of 10%. A ministry official said, "President Yoon Seok-yeol announced in February that the simplified taxpayer threshold would be significantly raised from 80 million won to 104 million won to reduce tax burdens, and the government revised the VAT Act enforcement ordinance accordingly, so from July the simplified taxpayer threshold will be adjusted to 104 million won," adding, "It is unlikely that former Chairman Han's proposal to raise it to 200 million won will be considered." At the time, former Chairman Han went further than President Yoon's announcement by pledging to expand the simplified taxpayer threshold to annual sales of 200 million won through legal amendments.

The VAT rate is stipulated as 10% in the VAT Act, so lowering the rate requires legal amendments and thus opposition cooperation is essential. The scope of simplified taxpayers is also delegated to presidential ordinances within the VAT Act, which sets the range from 80 million won to 130% of 80 million won based on the previous year's total supply amount. Therefore, to set an upper limit above 104 million won, which is the range adjusted by the Ministry of Economy and Finance through enforcement ordinances, legal amendments are necessary.

Abolition of Financial Investment Income Tax Requires Opposition Cooperation

The abolition of the financial investment income tax, which the Yoon administration is strongly pushing, also requires opposition cooperation. The ruling party cannot unilaterally amend the Income Tax Act and Restriction of Special Taxation Act to abolish the financial investment income tax. However, on the 9th, President Yoon Seok-yeol strongly emphasized the push for abolition, but there is a cautious atmosphere within the government. A government official said, "Since individual investors have great interest and President Yoon shows strong will for abolishing the financial investment income tax, efforts will be made to gain opposition cooperation." A key official from the Ministry of Economy and Finance also stated, "Since the president emphasized it as a major task and expressed the intention to push for abolition, the government is preparing accordingly."

Additionally, measures such as separate taxation on dividend income for companies expanding dividends as part of the corporate value-up program and corporate tax reductions are also expected to be difficult to implement. However, measures for low birth rates emphasized by the opposition, such as increasing childcare leave benefits and expanding paternity leave, are expected to proceed without difficulty. A Presidential Office official said, "We are currently prioritizing policies the government should pursue in the 22nd National Assembly following the 21st," adding, "We will do our best to achieve positive results through bipartisan agreement on issues like the abolition of the financial investment income tax."