With the special consumption tax cut on automobiles that began last year set to end on the 31st, attention is focusing on the impact on the auto market. The government has not yet said whether it will extend it. If it ends as is, consumers will face up to an extra 1 million won when buying a new car.
However, the benefit that reduces the special consumption tax on electric vehicles by up to 3 million won will remain in place for the time being. There is an outlook that the "tilt" toward Tesla, which has topped model-by-model sales ahead of domestic brands in Korea's car market, could accelerate.
According to the industry on the 17th, the flexible tax rate measure that cut the automobile special consumption tax rate by 30% to 3.5% from 5% of the factory price will end on the 31st. The reduction is capped at 1 million won, but when adding the education tax and value-added taxes calculated on that basis, the policy offers benefits of up to 1.43 million won.
To spur consumption, the policy took effect in Jan. last year and was extended twice for six months each in June and Dec. the same year. As the Ministry of Economy and Finance nailed down an end in June this year at the end of last year, the industry consensus is that the chance of continuing the tax cut is not high.
Because the automobile special consumption tax is included in the price consumers pay, the end of the cut will immediately increase the consumer burden. Taking Hyundai Motor's recently launched flagship sedan "The New Grandeur" as an example, the cheapest Premium trim (gasoline model) will rise by 650,000 won, from 41.85 million won to 42.5 million won.
Hyundai Motor's representative sport utility vehicle (SUV), the "Santa Fe," will go up by 560,000 won, from 36.06 million won to 36.62 million won. Among best-selling imported cars, BMW's representative midsize sedan, the "520i," is currently sold at 71.1 million won, but if the special consumption tax rate returns to 5%, it will rise by 900,000 won to 72 million won.
However, such price increases will inevitably concentrate on internal combustion engine cars. Electric vehicles receive a cut of up to 3 million won in the special consumption tax under Article 109 of the Act on Restriction on Special Cases Concerning Taxation. In other words, even if the tax rate rises to 5%, vehicles with a factory price up to 60 million won still do not pay the special consumption tax. Tesla's "Model 3" is currently sold from 41.99 million won, and the "Model Y Premium" from 49.9 million won. This system, in place since 2012 for the 14th year, is set to sunset on Dec. 31.
The auto industry says the domestic market has recently contracted sharply, so ending the tax cut would have a major impact. An industry official said, "Even if the Middle East war is winding down, the effects such as high oil prices will persist for some time," adding, "For imported cars, electric vehicles such as Tesla are supporting sales, but for domestic brands, the impact of weakened consumer sentiment is being felt as is." The official added, "Even if the special consumption tax is cut by only several hundred thousand won, there is a clear consumption-boosting effect as people move up their car purchases to that period."
There are particular concerns that domestic brands will be hit hard. According to the Korea Automobile & Mobility Association, domestic sales of Korean-made cars in May were 97,470 units, down 14.3% from a year earlier. As a result, sales of domestic brands from Jan. to May totaled 570,752 units, down 5.0% from the same period last year. In contrast, imported car sales from Jan. to May totaled 145,973 units, up 32.3% year over year. This was driven by a 250.8% surge in Tesla sales during the period.
Although domestic electric vehicles will also receive the special consumption tax reduction through the end of this year, demand for EVs is tilted toward Tesla, so the end of the tax cut could further fuel that. According to the Korea Automobile Importers & Distributors Association (KAIDA), Tesla ranks 1st, 2nd, 4th, 5th and 8th among the top 10 best-selling imported cars from Jan. to May. The only other EV in the rankings is BYD's "Sealion 7." Tesla's "Model Y" sold 8,762 units last month, beating Kia's "Sorento" to take the top spot overall.
However, the possibility that the automobile special consumption tax cut will be extended again cannot be ruled out. In June 2023, when the government ended the five-year run of the auto tax cut, it cited reasons such as favorable auto industry conditions and improving consumer conditions. In addition, the prospect of a revenue shortfall at the time also acted as a burden on the government in extending the tax cut.
This year, however, about 16 trillion won in excess tax revenue is expected compared with the initial projection, and consumption has been slow to recover due to high oil prices, a strong dollar and high interest rates.
An automobile industry official said, "The government is recently reviewing tax reductions across the board, so it is difficult to extend the special consumption tax cut," but added, "At every meeting with the government, the view is being conveyed consistently that the tax cut should be extended."