Gov`t to slap on new tax on high-priced handbags next year

Beginning next year, taxes on luxury handbags will go up under a tax revision bill proposed by the government Wednesday.

The new measure will categorize handbags with an import or factory price of 2 million won (1,770 U.S. dollars) or more as "high priced goods" and slap an additional 20 percent in individual consumption tax on the amount in excess of that amount.

The government said it proposed the new tax on luxury bags to be fair to jewelry items and watches that are subject to such taxes.

If the proposal is passed by the National Assembly, a customer buying a foreign handbag whose import price is 2.5 million won (2,212 dollars) will have to pay 100,000 won (88 dollars) in additional consumption tax. The percentage of price hikes by brand is expected to be different, depending on how much of the increased tax importers will reflect on sale prices.

"Considering operating profits and expenses, we believe that a handbag whose import price is 2 million won is sold on the market for 3.5 million (3,097 dollars) to 4 million won (3,539 dollars)," a government official said. "More expensive handbags will likely be subject to the individual consumption tax."

Luxury brands and sellers are perplexed over the proposed new tax, as a higher tax burden will likely affect sales at a time when many middle-class consumers are turning away from luxury goods amid an economic slump.

"I don`t understanding the timing," a source at a department store said. "The government levied no (individual consumption) tax when sales of luxury items were booming and is trying impose taxes when business is beginning to slump."

The source also warned that higher price tags will scare away many Chinese and Japanese tourists though they can get tax refunds.

The new taxes will also apply to luxury handbags that individual tourists purchase overseas and bring into the country.

"If declared as tourist belongings, a watch is subject to an additional tax of 50 percent, including individual consumption tax for an amount in excess of 1.85 million won (1,639 dollars)," said a customs official, adding that handbags whose prices exceed the tax exemption limit will be subject to the same tax rate as watches.

kimhs@donga.com