The Key to Domestic Auto Market Recovery: Extension of the Special Consumption Tax Reduction Needed

Concerns Over Obstacles to Economic Recovery as Semiconductor Supply Shortage Prolongs
Shipment Delays Expected with Expiry at End of Next Month

[Image source=Yonhap News]

[Asia Economy Reporter Ki-min Lee] As the prolonged shortage of automotive semiconductors disrupts vehicle production and delays vehicle delivery dates beyond initial expectations, the expiration of the individual consumption tax (ICT) reduction period is now just 55 days away. There is growing demand to extend the ICT reduction as consumers who have already contracted vehicles early are expected to miss out on the benefits of the ICT reduction. In particular, concerns are rising that if the ICT benefits, which have played a role in boosting domestic demand amid a sharp decline in manufacturing production and operating rates caused by disruptions in automobile production?the driving force of the Korean economy?disappear, it could become an obstacle to economic recovery.

According to the automotive industry on the 6th, the period for the ICT reduction applied to automobiles will end on the 30th of next month. The ICT is a tax imposed at a higher rate on luxury or consumption-restraining items, and the government has temporarily used the ICT reduction card when domestic demand stimulation was necessary. The extension of the ICT reduction card at the end of February last year was also in response to the economic downturn caused by the spread of COVID-19. At that time, the government applied a 1.5% rate, which was a 70% increase in the reduction rate, for four months until the end of June of the same year. From July of the same year, the ICT was readjusted to 3.5% and extended until the end of June this year. In fact, while global automobile sales decreased by 19% compared to 2019, the number of newly registered vehicles in Korea increased by 6.2%, from 1.8 million in 2019 to 1.91 million last year during the four months when the ICT was reduced by 7%. Economic experts analyze that this policy contributed to Korea’s relatively strong economic performance compared to other major global countries despite the COVID-19 crisis.

The problem is that if the ICT card disappears amid the semiconductor shortage causing factory shutdowns and production delays, it could hamper economic recovery. The automotive industry is expected to face a sales cliff immediately after the end of June, and large-scale contract cancellations may also occur. Mr. Lee, an office worker who contracted a popular model from a domestic automaker at the end of last year, said, "I heard that due to the automotive semiconductor shortage hitting the finished car industry in the first half of this year, production is delayed and the vehicle will not be delivered until after August," adding, "If I cannot receive the ICT reduction, I am considering whether to cancel the contract."

Professor Ho-geun Lee of the Automotive Department at Daeduk College pointed out, "Currently, the domestic economy is not in a good situation, and the semiconductor shortage has led to recommendations for negative options." He added, "The ICT reduction policy has been continued for years as an economic stimulus measure, and automobiles are no longer luxury goods," concluding, "Ultimately, the process should move toward abolishing the ICT."

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