[2020 Tax Law] Tax Cuts for Self-Employed, SMEs, and Low-Income Earners... VAT Simplified Taxation Threshold Adjusted for the First Time in 20 Years

Tax System Development Deliberation Committee Approves the '2020 Tax Law Amendment Proposal'

[Sejong=Asia Economy Reporter Kim Hyunjung] The '2020 Tax Revision Plan' announced by the government on the 22nd focuses on increasing taxes on high-net-worth individuals and high-income earners, while reducing the tax burden on ordinary citizens, small and medium-sized enterprises (SMEs), and small self-employed businesses. In particular, the value-added tax (VAT) simplified taxation system has been revised for the first time in 20 years to alleviate the tax burden on small business owners. Measures such as raising the credit card income deduction limit that the general public can feel and exempting VAT on regular express bus fares have also been reflected in this tax revision plan. Various tax benefits for SMEs, which were scheduled to expire at the end of this year, have been extended by relaxing some criteria.

The Ministry of Economy and Finance held the Tax System Development Deliberation Committee at the Bankers Hall in Seoul on the 22nd to review and approve the '2020 Tax Revision Plan' containing these details.

◆ VAT Simplified Taxation Threshold Raised for the First Time in 20 Years = The government decided to significantly raise the VAT simplified taxpayer threshold from an annual sales amount of 48 million KRW to 80 million KRW to reduce the tax burden on small self-employed businesses and improve payment convenience. The exemption threshold for VAT payment among simplified taxpayers will be adjusted from the current annual sales of 30 million KRW to 48 million KRW. Under the current standard, all simplified taxpayers are effectively exempted.

Simplified taxpayers are exempt from the obligation to issue tax invoices and are subject to special VAT rates by industry (5-30%). Exempt taxpayers, as the name implies, are simplified taxpayers whose sales are below a certain amount and are exempt from VAT payment obligations. This system has not had its threshold adjusted for 20 years since July 2000, and has been criticized for not properly reflecting inflation and socio-economic changes. However, since an increase in simplified taxpayers trading without tax invoices could undermine tax transparency, the issuance of tax invoices has been made mandatory for simplified taxpayers and exempt taxpayers along with this measure. The filing obligation is once a year.

The government estimates that the increase in the threshold will add 230,000 simplified taxpayers. Although there are differences depending on sales, industry, and business characteristics, an average reduction effect of 1.17 million KRW per person is expected. The number of VAT payment exempt taxpayers is also expected to increase by 340,000 compared to the current standard. With a tax saving effect of 590,000 KRW per person, a total tax reduction of about 200 billion KRW is anticipated.

For example, Restaurant A, with sales of 53 million KRW and purchases of 39 million KRW, had to pay 1.22 million KRW in VAT under the current standard, but under the revised VAT law, only 390,000 KRW is required, a reduction of 68%. Hair Salon B, with sales of 60 million KRW and purchases of 22 million KRW, had to pay 2.98 million KRW in VAT currently, but under the revised standard, only 1.68 million KRW, a 44% decrease, is payable.

Amid the impact of COVID-19, the wrinkles of small business owners and self-employed individuals are deepening. On the 30th, citizens visited the kitchen street in Hwanghak-dong, Seoul. Photo by Mun Ho-nam munonam@

◆ Increased Tax Benefits for SMEs and Raised Credit Card Income Deduction Limits = The government also included tax reduction and burden relief benefits for SMEs in this tax revision plan. Considering the management difficulties caused by COVID-19, the special tax reduction system for SMEs, which was scheduled to expire at the end of this year, has been extended for two years, allowing income tax or corporate tax reductions of 5-30% depending on location, industry, and size. Last year, 1.17 million SMEs benefited from tax reductions totaling 2 trillion KRW.

Additionally, VAT payment on imports by export-oriented small and medium-sized enterprises will be deferred until the scheduled (final) tax filing at the tax office to ease corporate cash flow burdens. The fuel tax on diesel used by coastal cargo ships will also be reduced by 15% for two years starting next year. To support strategic research and development (R&D) by SMEs, patent investigation and analysis costs will be included in the R&D expense tax credit, encouraging the development of technologies and products that do not overlap with existing patents and the creation of patents.

Furthermore, the tax credit application period for mutual growth payment amounts has been extended by two years, and the conditions for deferring import VAT payments have been relaxed to SMEs with an export ratio of 30% or more and export sales of 5 billion KRW or more. For mid-sized companies, the export ratio requirement for import VAT deferral was previously 50%, but this has been lowered to 30%.

To stimulate consumption in response to COVID-19, the credit card income deduction limit will be temporarily raised. For total annual income of 70 million KRW or less, the limit is raised to 3.3 million KRW; for 70 million to 120 million KRW and over 120 million KRW, the limits are raised to 2.8 million KRW and 2.3 million KRW respectively, each increased by 300,000 KRW compared to the current limits. However, the increased deduction limits will only apply through this year.

To reduce transportation costs, VAT on regular express buses will be completely exempted. When the VAT law was introduced in 1977, express buses and airplanes were classified as luxury transportation and excluded from VAT exemption. However, as express buses have effectively become public transportation, the government decided in 2015 to exempt VAT on regular express buses, excluding premium buses, until the end of this year. This tax revision removes the expiration date, providing permanent tax support. The individual consumption tax reduction period for electric passenger cars is also extended by two years.

Meanwhile, the 2020 Tax Revision Plan announced today will be submitted to the National Assembly after legislative notice, inter-ministerial consultation, and Cabinet meeting, and will be finalized through National Assembly deliberations.

This content was produced with the assistance of AI translation services.