Rep. Kim Jae-seop: "Small Businesses Face 700 Billion Won Tax Burden Increase Over 5 Years" ... Analysis of Tax Revision Plan

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

The final plan is expected to be finalized soon following revisions incorporating various opinions gathered during the legislative notice period.

As always, real estate was by far the most contentious issue in the announcement of this tax revision plan.

The political sector has also continued daily debates over the tax burden on single homeowners of non-residential properties.

Consequently, certain tax reform items have received relatively little attention.
 

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

To see which tax items are causing this impact, we examined the report titled "Impact on Small Businesses under the 2026 Tax Revision Plan" analyzed by the Korea Federation of Micro Enterprise.
 
There are four main items causing significant concern for the Korea Federation of Micro Enterprise.

First, the change most acutely felt by many self-employed individuals is the reduction in the credit card sales tax deduction.

Previously, individual business owners with annual sales of 1 billion won or less were allowed to deduct 1.3% of their credit card sales from value-added tax (VAT).

However, this deduction rate is set to be reduced to 1.2%.

The deduction cap will also be adjusted, cut in half from 10 million won to 5 million won.

The government maintains the position that it is gradually normalizing temporary special tax treatments introduced during periods such as the global financial crisis.

Cho Man-hee, Director General of the Tax and Customs Office at the Ministry of Economy and Finance, explained in a prior briefing, "As the goal of encouraging credit card use has been largely achieved, we decided on a slight reduction in the preferential deduction rate while taking into account the difficult circumstances of the self-employed."

However, self-employed business owners are pushing back.

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

They argue that because the deduction limit is also being lowered, the actual increase in burden is even larger.

The annual sales threshold at which the cap begins to apply will drop from 770 million won to around 420 million won.

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

Cha Nam-soo, head of policy development at the Korea Federation of Micro Enterprise, stated, "Halving the deduction limit and lowering the deduction rate is expected to act as an effective direct tax hike on small business owners and the self-employed who are pushed to the brink by sluggish domestic demand and high interest rates."
 
The "Special Taxation for SMEs Retaining Employment" will also be abolished.

This program provides tax incentives to companies that reduce total payroll instead of laying off employees amid management difficulties.

Companies receive tax reductions if they maintain employment by shortening employees' working hours or sharing jobs.

The government introduced this special provision in 2009 and had repeatedly extended its sunset clause, but it plans to end the provision's effective period this year.

The Ministry of Economy and Finance expects a tax revenue effect of 3.2 billion won over the next five years.

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

At an SME Ombudsman meeting held on August 11, calls were also made to extend the special tax treatment.

The MainBiz Association pointed out, "Under circumstances where labor and fixed costs have increased significantly, with the minimum wage rising 71.1% compared to 11 years ago, it is difficult to incentivize companies to retain employment with current deduction levels."

The association also 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 through 2028.
 
There have been numerous recent reports predicting that draft beer prices will rise in the future.

This is because the government has decided to end its liquor tax discount on draft beer distribution this year.

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

The system was introduced to ease the burden on liquor manufacturers and self-employed businesses struggling during the COVID-19 pandemic.

Although the government extended the application period twice, it decided in this tax reform to end the measure for the first time in seven years.

The Ministry of Economy and Finance projected that restoring the standard liquor tax rate will generate approximately 46 billion won in tax revenue over five years.

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

However, concerns are mounting that this burden will ultimately 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 is passed along the chain from factory price to wholesale price to restaurant purchase price, ultimately imposing a burden on small business owners who sell draft beer."

Assuming a restaurant sells 30 20-liter kegs a month, it would bear an additional cost burden of about 150,000 won each month, amounting to 1.8 million won annually.
 
The special income tax rate for foreign workers will also be increased.

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

Under this tax revision plan, the government decided to raise the flat rate from 19% to 21%.

Higher-earning foreign workers benefit more from the 19% flat rate, and the original purpose of introducing the special taxation was to attract outstanding foreign professional talent to South Korea.

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

It reported that about 5,600 people were subject to this special taxation annually as of 2024.

The Korea Federation of Micro Enterprise expressed concern, stating, "Small businesses employing foreign specialized talent will see reduced hiring competitiveness, and incentives for long-term retention will weaken."

Cha Nam-soo, head of policy development, stated, "Amid persistent labor shortages in small workplaces such as manufacturing and restaurants, cutting tax benefits will reduce foreign workers' take-home pay, accelerating staff departures and ultimately increasing actual labor cost burdens for small business owners."
 
In announcing the tax revision plan, the government estimated the tax revenue effect at approximately 2.5 trillion won.

An increase in tax revenue boosts government finances, providing more funds to support livelihoods, welfare, and other programs.

However, what must not be overlooked is 'from whom it is being collected.'

Representative Kim Jae-seop said, "Due to this tax revision, the tax burden on small business owners is expected to increase by nearly 700 billion won over the next five years. Given the current economic conditions where difficulties for small business owners are worsening due to high inflation, weak domestic demand, and rising costs, now is not the time to increase the tax burden, but rather to relieve it."

He added, "The government must supplement the tax revision plan by fully reflecting the voices of small business owners, who are the subjects of these policies."

(Photo: Yonhap News)
※ Please note: This article was translated by AI and may contain errors.