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Revision Bill on Tax Reduction for SMEs in a Controversy

Revision Bill on Tax Reduction for SMEs in a Controversy

Posted September. 14, 2005 07:46,   


The political circle on September 13 rose up against the government’s decision to exclude small- and mid-sized companies in the capital area, including Seoul, Incheon, and Gyeonggi Province, from receiving tax breaks as part of its move to revise the tax cut system for small and medium-sized enterprises (SMEs).

The Ministry of Finance and Economy recently submitted the revised legislation of the Special Tax Treatment Control Law, aiming to remove the special tax treatment for SMEs to be expired by the end of this year and introduce a new tax incentive system for balanced development.

The existing tax cut system allows for corporate or income tax reduction of 10 to 20 percent for SMEs in the capital region and five to 30 percent for those in the non-capital area, while the revision bill completely removes the small and mid-sized companies of the capital area from the list of tax break beneficiaries by specifying the target as “non-capital area SMEs.”

In response, the Grand National Party members from Gyeonggi Province held a contingency meeting at a hotel in Yeouido, Seoul to reach consensus on strongly opposing the reform bill of the government.

GNP member Kim Young-sun from Ilsan, Goyang City, condemned the government, “The revised legislation shifts the responsibility of tax revenue shortage onto small-scale businesses and ordinary people in the capital region.”

Jung Jang-sun, the Uri Party’s policy administrator, also clearly expressed his negative stance, “Eliminating some of the tax reduction for SMEs amid the economic difficulties needs to be reviewed.”

The current tax reduction given to small- and mid-sized companies applies across 29 industries, including construction, retail and wholesale, and medicare, as well as manufacturing.

Meanwhile, the revised bill lowers the reduction rate for the metropolitan area in non-capital regions from the existing 30 percent to 20 percent while applying 40 percent for 70 lagging areas announced by Ministry of Government Administration and Home Affairs, including Cheongyang-gun of Chungnam Province and Hwacheon-gun of Gangwon Province.

Given the disproportionate concentration of SMEs in the capital area, eliminating the tax favors for small-scale businesses altogether is expected to affect approximately half of the small and medium sized firms.

The National Statistical Office and Gyeonggi Province estimates the number of mid-sized companies with 100 to 300 employees located in the capital region at 48,065 and that of small enterprises at 1,353,004, accounting for 56.3 percent and 46.4 percent of the total, respectively.

The reduction in corporate tax alone in Gyeonggi Province last year amounted to 117 billion won.

In-Jik Cho cij1999@donga.com