More Tax Burden on Employees

Starting next year, even when one spends more money with a credit card, he or she will receive a lower tax refund at the end of the year. If an employee with 40 million won in salary spends 20 million won a year, he will get 130,000 won less in deductions than previous years since the income tax deduction rate will decrease from 20 percent to 15 percent.

As of January 2006, tax rates for distilled liquor and liquefied natural gas (LNG) will rise, bringing the price of soju (distilled liquor) up by 100 won to 200 won a bottle. Also, a household will have to pay 15,600 won more for heating every year.

Amid lackluster domestic demand, increased tax burdens on households and employees may lead to a reduction in household disposable income, further weakening household consumption.

The Ministry of Finance and Economy announced a completed “2005 Taxation Revision Bill” on August 25. The proposal is set to be submitted to the National Assembly on September 30 after going through a discussion in the State Council on September 20.

Kim Yong-min, director of the taxation department of the ministry explained the reason for the tax increase. “Last year’s tax revenues were 4.3 trillion won less than the amount expected in the budget. Worse yet, in the first half of this year, tax collection has been slower than last year,” said Kim.

According to the ministry’s estimation, when implemented, the new taxation rate will bring one trillion won more taxes into the government coffers, with 700 billion won to 800 billion won in increased soju and LNG taxes and 180 billion won in additional taxes from the lower income tax deduction rate.

When one spends money with cash, debit cards, and pre-paid cards (cards with deductible balances that bear one’s name), that person is subjected to the reduced-rate tax deduction.

Tax rates on distilled liquor including soju, whiskey, and vodka increased from 72 percent to 90 percent, and the government will impose taxes on LNG of 60 won per kilogram, up from 40 won. The tax on beer will go down, however, from 90 percent of the price to 80 percent.

Owners of apartment units smaller than 25.7 pyeong in net area but more expensive than 200 million won in market value will no longer be eligible for mortgage and long-term housing purchase savings account tax breaks starting next year. Those with more than two houses will be required to pay taxes on income from rent.

The ministry will ease the tax burden on the self-employed that run small stores, restaurants and inns by lowering value-added tax rates on a temporary basis until 2007.

Joong-Hyun Park sanjuck@donga.com legman@donga.com