As it was reported that the cut to the special consumption tax on passenger cars, which is being implemented to revive consumer demand in the domestic auto market, is likely to end at the end of this year, automakers are worried about a contraction in the domestic market. Domestic automakers are also facing difficulties in the global market due to the United States' high tariffs.
According to an industry source at an automaker on the 25th, the government and the Democratic Party of Korea have set an internal policy not to extend the special consumption tax cut scheduled to end at the end of this year, judging that the shortfall in tax revenue has become severe. The source said, "The government is leaning toward focusing on scrapping old vehicles and tax support rather than tax cuts when purchasing new cars."
Through the "2025 economic policy direction" announced in Jan., the government said it would cut the special consumption tax by 30% for six months for new car buyers. As a result, the tax rate applied when purchasing a car was lowered from the previous 5% to 3.5%. The special consumption tax cut was extended once in Jun.
However, as the recent tax revenue shortfall has worsened, it has become difficult to continue extending the auto special consumption tax cut. The Ministry of Economy and Finance, in the "new government supplementary budget bill" announced in Jun., revised this year's national tax revenue budget from the original 382.4 trillion won down by 10.3 trillion won to 372.1 trillion won. Vice Minister Lim Gi-geun of the ministry said, "We reflected a projected shortfall of 10.3 trillion won in light of changes in tax revenue conditions and actual collections."
There has been wide assessment that the special consumption tax cut for cars produced significant effects on domestic sales for automakers. Hyundai Motor had no standout new models this year aside from the new large sports utility vehicle (SUV) Palisade and the new large electric SUV Ioniq 9, yet its cumulative sales through Aug. reached 469,457 units, up 2.1% from the same period a year earlier. In contrast, overseas sales were 2,269,384 units, down 0.1% over the same period.
Since Apr., the United States has imposed a 25% item-specific tariff on imported cars and has been adjusting rates through negotiations with individual countries. In the negotiations in Jul., Korea agreed to lower the auto tariff rate from 25% to 15%, but because the two sides failed to narrow differences over the structure of the $350 billion (about 484 trillion won) investment in the United States and profit sharing, the 25% tariff continues to be applied.
Hyundai Motor, Kia, and GM Korea have a high share of their total sales in the U.S. market. With the high tariffs continuing for six months, they are in a situation where they must make up for deteriorated U.S. export performance in the domestic market.
An industry source at an automaker said, "Hyundai Motor and Kia have not raised sales prices out of concern over losing market share in the United States, so the impact of the tariffs is showing directly in their results," and added, "There is an expectation that the release of new models next year will offset this year's deteriorated performance." The person added, "If the special consumption tax returns to its original level, the effect of next year's new models could be halved."