With the special consumption tax cut on automobiles that began last year set to end on the 31st, attention is turning to 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 1 million won in additional costs when buying a new car.
However, the benefit that cuts the special consumption tax on electric vehicles by up to 3 million won will remain in place for the time being. Some say the "tilt" toward Tesla, which has topped the model-by-model sales rankings ahead of domestic brands in Korea's auto 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% from 5% to 3.5% of the factory price will end on the 31st. The reduction is capped at 1 million won, but when including the education tax and value-added taxes calculated on that basis, the benefit reaches up to 1.43 million won.
The policy, introduced in January last year to boost consumption, was extended twice for six months each in June and December of the same year. As the Ministry of Economy and Finance set an end in June this year at the end of last year, the industry largely believes the tax cut is unlikely to continue.
Because the automobile special consumption tax is included in the price consumers pay, the end of the cut will immediately raise their burden. For example, for Hyundai Motor's newly released flagship sedan The New Grandeur, the lowest-priced 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, the Santa Fe, will go up by 560,000 won from 36.06 million won to 36.62 million won. Among imported best-selling cars, BMW's representative midsize sedan, the 520i, is now 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 get up to a 3 million won cut in the special consumption tax under Article 109 of the Act on Restriction on Special Cases Concerning Taxation. In other words, for vehicles with a factory price up to 60 million won, the special consumption tax still does not apply even if the rate rises to 5%. Tesla's Model 3 is currently priced from 41.99 million won, and the Model Y Premium starts from 49.9 million won. This measure, in place for 14 years since 2012, is set to sunset on Dec. 31.
The auto industry says the domestic market has recently slumped sharply, so the end of the tax cut would be a heavy blow. An industry official said, "Even if the war in the Middle East is winding down, the aftermath such as high oil prices will persist for some time," adding, "For imported cars, electric vehicles like Tesla are providing support, but domestic brands are feeling the full brunt of weaker consumer sentiment." The official also said, "Even a cut of tens of thousands of won clearly boosts consumption, as people time their car purchases to that period."
Concerns are rising 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 cars totaled 570,752 units from January to May, down 5.0% from the same period last year. In contrast, imported car sales totaled 145,973 units from January to May, up 32.3% year over year. That was driven by a 250.8% surge in Tesla sales during the period.
Although domestic electric vehicles also receive special consumption tax cuts through the end of this year, demand for EVs is concentrated on Tesla, and the end of the tax cut could further spur that. According to the Korea Automobile Importers & Distributors Association (KAIDA), Tesla ranks first, second, fourth, fifth and eighth among the 10 best-selling imported cars from January to May. The only other EV in the rankings is BYD's "Sea Lion 7." Tesla's Model Y sold 8,762 units last month, overtaking Kia's Sorento to take the overall No. 1 spot.
That said, the possibility that the special consumption tax cut on automobiles will be extended again cannot be ruled out. In June 2023, when the government ended the five-year tax-cut measure, it cited favorable auto industry conditions and improved consumer circumstances. At the time, an expected shortfall in tax revenue also weighed on the government's decision to extend the cut.
This year, however, excess tax revenue is projected at about 16 trillion won above earlier forecasts, while consumption remains sluggish amid high oil prices, a strong dollar and high interest rates.
An auto industry official said, "The government is reviewing tax cuts across the board, so it's difficult to extend the special consumption tax cut," but added, "At every opportunity with the government, we continue to convey the view that the cut should be extended."