The Self-Employed to Pay Less VAT

The value added tax burden on the small-scale self-employed (subject to the simplicity taxation system) whose annual revenues are below 48 million won will be relieved starting from next year. The Ministry of Finance and Economy (MOFE) announced on June 9 that it would lower the VAT rates multiplied by sales in order to reduce the VAT standard of assessment (income base for taxation) applied to the self-employed.

When the VAT rate is lowered, the standard of assessment and tax burden will decrease accordingly. The MOFE plans to decide an appropriate VAT rate based on the result of a study on the current status of the self-employed during the first half of this year (July-December 2005). The newly lowered rate will be effective from July 2006.

Why the VAT Rate Should Be Lowered-

The government categorized the self-employed service industry into three groups in 2000 in order to simplify the once-complicated VAT rate system. The VAT rate for each group was changed to 20 percent and gradually raised each year depending on each group’s profitability, leading to the establishment of the current VAT system. The VAT rates applied for each group are as follows: 40 percent for restaurant, accommodation, transportation, telecommunication businesses; 30 percent for real estate rental and related services, construction, agriculture and fishing businesses; and 20 percent for manufacturing, electricity and gas, water supply, retail, recycling material collection, and sales businesses.

However, some arrangements were needed on adjusting the VAT rates for restaurant and accommodation businesses as they had experienced a dramatic fall in their profitability for the last two years. Some experts criticized this movement at the time the VAT rate system was established just two years ago by saying, “Administrative resources are being drained due to a near-sighted tax policy.”

How Much Will the VAT Be Lowered-

When the VAT rate decreases from 40 to 35 percent, how much of the VAT will the owner of a restaurant with annual revenues of 30 million won be able to save? The current VAT standard of assessment is 12 million won (30 million multiplied by 40 percent), and the VAT comes to 1.2 million won after being multiplied by 10 percent. When the VAT rate is lowered to 35 percent, the standard of assessment will decrease to 10.5 million won (30 million multiplied by 35 percent), and the VAT will stand at 1.05 million won, 150 thousand won lower than the current amount.

Assessing the Incomes of the Self-Employed Should Come First-

Gwon Oh-seong, a senior researcher at the Korea Institute of Public Finance, emphasized, “It is most important to assess the incomes of persons subject to the simplicity taxation system. This implies that optimal VAT rates can be obtained only after the government makes an accurate estimation of the incomes of the self-employed. The self-employed have asked for a big reduction in the VAT rates. Yim Eui-yeon, the secretary general of the Small Business Association, said, “It is more critical to increase the disposable income of the self-employed rather than to come up with grandiose measures like self-employed business restructuring.”

legman@donga.com