Rep. Kim Jae-seop: "Tax Reform to Add 700 Billion Won Burden on Small Businesses over 5 Years"

▲ People Power Party Representative Kim Jae-seop

The tax reform proposal announced by the government on August 3 will be submitted to the National Assembly early next month after passing through the Cabinet meeting.

Various opinions were gathered during the legislative notice period, and the final bill is expected to be finalized soon after supplementary work.

As always, the hottest topic in this tax reform announcement was undeniably real estate.

The political circle also engaged in daily debates over the tax burden on non-resident single-home owners.

Consequently, several tax reform items received relatively little attention.

"A tax reform that ignores the reality of the self-employed"
-Korea Federation of Micro Enterprise-

The office of People Power Party Representative Kim Jae-seop announced that based on an analysis of data submitted by the Ministry of Economy and Finance, certain revised items could increase the tax burden on small business owners and small and medium-sized enterprises (SMEs) by nearly 700 billion won over the next five years.

To see which tax items cause such an impact, we examined the report titled "Impact of the 2026 Tax Reform Proposal on Small Businesses" analyzed by the Korea Federation of Micro Enterprise.

Credit Card Sales Deduction 'Cut in Half' Sparks Backlash from Self-Employed... Government Projects "474 Billion Won Revenue Effect"

The Korea Federation of Micro Enterprise has raised major concerns regarding four key areas.

First, the measure most directly felt by many self-employed individuals is the reduction of the credit card sales tax credit.

Previously, individual business owners with annual sales of 1 billion won or less received a 1.3% deduction on sales paid by credit card from their value-added tax (VAT).

However, the government decided to lower this deduction rate to 1.2%.

The maximum deduction limit will also be slashed by half, from 10 million won to 5 million won.

The government maintains that it is phasing out temporary special provisions that were introduced during the global financial crisis and other downturns to normalize the tax system.

Cho Man-hee, director general of the Tax and Customs Office at the Ministry of Economy and Finance, explained at a previous pre-briefing, "As the objective of encouraging credit card usage has been largely achieved, we decided on a slight reduction in the preferential deduction rate while taking into account the difficult circumstances of self-employed individuals."

However, self-employed business owners are pushing back.

The Korea Federation of Micro Enterprise stated, "Calculating based on the 2023 tax deduction amount for credit card and cash receipt issuance, the annual tax burden will increase by more than 240 billion won."

They argue that the actual increase in burden will be even larger due to the reduced deduction ceiling.

The annual sales threshold at which the deduction cap starts to apply will be lowered from 770 million won to around 420 million won.

According to Representative Kim Jae-seop's office, the Ministry of Economy and Finance expects the revision of the credit card sales tax credit to generate approximately 474 billion won in additional tax revenue over the next five years starting next year.

Cha Nam-soo, head of policy development at the Korea Federation of Micro Enterprise, stated, "Halving the tax deduction limit and lowering the deduction rate will effectively function as a direct tax increase on small business owners and self-employed individuals who are already pushed to the brink by sluggish domestic demand and high interest rates."

Tax Incentives for Employment Retention to Be Abolished

The 'Special Taxation for Small and Medium Enterprises Maintaining Employment' will also be abolished.

This system is a special provision for companies that, despite management difficulties, retain employment instead of conducting layoffs while reducing total wage amounts.

Under this scheme, businesses receive tax deductions if they maintain headcount by reducing employees' working hours or sharing jobs.

The government introduced this special provision in 2009 and had repeatedly extended its sunset clause, but it now plans to terminate the scheme at the end of this year.

The Ministry of Economy and Finance estimates that this will generate 3.2 billion won in tax revenue over the next five years.

However, the SME sector is pushing back, arguing that it will be difficult to maintain employment once the tax deduction benefits disappear.

During an SME Ombudsman roundtable held on August 11, calls were also made to extend the tax incentive.

The MainBiz Association pointed out, "Under circumstances where labor and fixed cost burdens have surged significantly, including a 71.1% increase in the minimum wage compared to 11 years ago, the current level of deductions makes it difficult to incentivize companies to maintain employment."

It demanded that the deduction rates be raised from the current 10% and 15% to 20% and 30%, respectively, and that the application period be extended until 2028.

End of Draft Beer Liquor Tax Reduction... "Burden Will Ultimately Shift to Small Businesses"

There have recently been numerous reports warning that draft beer prices will rise in the near future.

This is because the government has decided to terminate its liquor tax reduction on draft beer distribution at the end of this year.

Under the current Liquor Tax Act, draft beer in containers of 8 liters or larger that use separate tapping equipment is taxed at only 80% of the standard beer tax rate.

This provision was introduced to ease the burden on liquor manufacturers and self-employed businesses facing difficulties during the COVID-19 pandemic.

The government had extended the application period twice, but decided in this tax reform to end the benefit for the first time in seven years.

The Ministry of Economy and Finance projected that reinstating the standard liquor tax rate would yield approximately 46 billion won in tax revenue over five years.

Going forward, liquor manufacturers will face an increased tax burden of around 5,000 won per 20-liter draft beer keg.

However, concerns are growing that this burden will eventually be passed on to self-employed business owners.

The Korea Federation of Micro Enterprise stated, "Although the draft beer tax is levied on manufacturers, it will be shifted down the chain from factory price to wholesale supply price to restaurant purchase price, ultimately placing a burden on small business owners serving draft beer."

Assuming a restaurant sells 30 kegs of 20-liter beer per month, it will shoulder an added cost burden of approximately 150,000 won per month, or 1.8 million won per year.

 Reduction in Foreign Worker Income Tax Incentives... "Could Accelerate Manpower Drain"

The preferential income tax rate for foreign workers will also be raised.

While general workers are subject to progressive tax rates ranging from 6% to 45% depending on their taxable income bracket, foreign workers have been allowed to opt for a flat tax rate of 19% instead of progressive rates.

Under the latest tax reform bill, the flat rate will be increased from 19% to 21%.

Applying the 19% flat rate is more advantageous for higher-earning foreign workers, and the government's original purpose in introducing the special taxation was to attract highly skilled foreign professional talent to South Korea.

The Ministry of Economy and Finance estimated that raising the flat tax rate would produce around 150 billion won in tax revenue over the next three years.

It noted that approximately 5,600 people per year were subject to the special taxation as of 2024.

The Korea Federation of Micro Enterprise expressed concern, stating, "Small businesses employing foreign professionals will lose recruitment competitiveness, and incentives for long-term retention will weaken."

Cha Nam-soo, head of policy development, stated, "Amid ongoing hiring difficulties at small workplaces in manufacturing, dining, and other sectors, reducing tax benefits will decrease the take-home pay of foreign workers, accelerating workforce outflows and ultimately increasing the real labor cost burden on small business owners."

"Small Business Tax Burden to Increase by 700 Billion Won over 5 Years"

Upon announcing the tax reform proposal, the government estimated that its overall tax revenue effect would reach approximately 2.5 trillion won.

When tax revenue increases, government finances expand, providing more funds to support public livelihoods, welfare, and other programs.

However, what must not be overlooked is who bears the burden of these taxes.

Representative Kim Jae-seop said, "This tax reform is projected to increase the tax burden on small businesses by nearly 700 billion won over the next five years. Given the current economic conditions where small business owners face compounded difficulties due to high inflation, weak domestic demand, and rising costs, now is the time to alleviate their tax burden rather than increase it."

He emphasized, "The government must thoroughly reflect the voices of small business owners, who are directly affected by these policies, and supplement the tax reform proposal."

(Photo: Yonhap News)

※