[Column] Liquor Tax Act That Gave Rise to Whiskey Expedition... Needs Revision

72% Tax Imposed on Distilled Spirits
Overseas Liquor Shopping Becomes a Trend
Resale Incentives Driven by Price Gaps
Ad Valorem Tax System of Over 50 Years Needs Reform

'An anachronistic liquor tax law.'

This was the most passionate comment from readers in response to the [Leaking K-Liquor Tax] series addressing South Korea's liquor tax system and its issues.

Systems and laws that regulate social order inevitably undergo changes from the moment they are enacted. They must be flexibly reinvented to suit the times by altering their forms and interpretations according to global changes. However, looking at our liquor tax law, it seems not only to ignore change but even strongly resist it. The current liquor tax law has adopted an ad valorem tax system, which taxes based on the ex-factory price of liquor, for over 50 years. Under this ad valorem system, the higher the ex-factory price of the liquor, the heavier the tax burden, causing the selling price to rise significantly. Especially for distilled spirits, the tax rate is 72%. When indirect taxes such as education tax and value-added tax are added, along with distribution margins, prices skyrocket, and it is common for a 100,000 won bottle of liquor to exceed 200,000 won, sometimes even jumping to 300,000 to 400,000 won.

The increased ex-factory price acts as an obstacle to the growth of the domestic liquor industry. When production costs rise due to the use of better ingredients for premiumization, the increase in ex-factory price directly reflects in the tax burden, leading to higher selling prices. This structure means that efforts to produce premium liquor actually hinder sales. It is as if the government is encouraging the production of low-priced liquor rather than premium liquor. Due to the lack of competitive national flagship liquors, last year’s liquor trade deficit reached approximately 1.3 trillion won.

The higher selling prices also increase the burden on consumers. In a world where price information is shared globally, the same product is sold at a uniquely high price only in Korea, inevitably creating incentives for arbitrage. In fact, imported liquors outside this tax burden have recently flooded into the domestic market through overseas travelers and direct overseas purchases. Liquor brought in this way is exploited for illegal resale, distorting the domestic distribution order and posing threats to public health by evading food safety inspections.

The volume-based tax system, which we are ignoring, is the international standard taxation system adopted by 34 out of 38 member countries of the Organisation for Economic Co-operation and Development (OECD). Switching to a volume-based tax would reduce the tax burden on high-priced liquors, lower prices, improve consumer welfare, and eliminate incentives for illegal distribution such as resale. Additionally, the tax burden that hindered research and development for quality improvement under the ad valorem system would decrease, promoting the supply of high-quality liquors. Above all, since the volume-based tax is levied in proportion to the quantity and alcohol content of liquor, it better aligns with the corrective taxation purpose regarding the social costs of drinking.

French philosopher Henry Bergson said, "To exist is to change." Changing means maturing, and maturing means continuously creating oneself. If one does not change and remains stagnant, one gradually loses the reason for existence. It is time to reconsider the reason for the existence of the liquor tax law together.