[Tax Story] A Retrospective and Outlook on the Hwangap (還甲) Fuel Tax

The largest-ever reduction in fuel tax has been implemented. The government has temporarily cut the fuel tax by 20% on gasoline and diesel released from refineries for six months, from the 12th of last month until April 30th next year. This measure is part of efforts to control prices amid the sharp rise in international oil prices. In the first week of November, just before the tax cut, the average nationwide gasoline price at gas stations was 1,787 KRW per liter, and diesel was 1,585 KRW per liter. After the reduction, gasoline prices in the 1,500 KRW range and diesel prices in the 1,400 KRW range are expected. Among the 11,091 gas stations nationwide, the fuel tax cut was immediately reflected at 765 refinery-operated stations and 1,233 budget gas stations, and as inventory at other stations is depleted, the price reduction effect is appearing, easing the burden on drivers. However, due to the steep rise in international oil prices and the decline in the fuel subsidy payment rate linked to the fuel tax, the perceived effect of the fuel tax cut in the future remains to be seen.

The fuel tax consists of levies on vehicle gasoline and diesel. First, a transportation, energy, and environment tax of 529 KRW per liter for gasoline and 375 KRW per liter for diesel is imposed. In addition, a driving-related automobile tax and education tax are added at 26% (138 KRW per liter) and 15% (79 KRW per liter) respectively of the transportation, energy, and environment tax amount. Furthermore, a value-added tax (VAT) of 10% on the above fuel tax amount (75 KRW per liter) is added. Considering the petroleum import duty of 3% of the import price automatically imposed when importing gasoline and the petroleum import surcharge of 16 KRW per liter, consumers end up paying indirect taxes exceeding 50% of the gasoline price. The transportation, energy, and environment tax, which accounts for about two-thirds of the fuel tax, is the fourth largest major tax source after income tax, VAT, and corporate tax. According to the 2020 National Tax Statistics Yearbook and Local Tax Statistics Yearbook, the transportation, energy, and environment tax amounted to 14.8 trillion KRW, the education tax to 2.2 trillion KRW, and the driving-related automobile tax to 3.7 trillion KRW. With various tax items under the name of fuel tax securing over 20 trillion KRW annually, the popular satire calling it a "tax cocktail" and a "bottomless tax source" is not without reason.

The history of the fuel tax dates back 60 years to December 8, 1961, when the Petroleum Tax Act was enacted. Initially, taxes on petroleum products were stipulated under the Commodity Tax Act, but petroleum products were separated and legislated separately due to their abundant tax base and different taxation methods from other goods. In 1977, the indirect tax system was significantly reformed, creating the Value-Added Tax Act and Special Consumption Tax Act, leading to the repeal of the Petroleum Tax Act, and petroleum taxes were levied separately as VAT and special consumption tax. Meanwhile, the Transportation Tax Act, enacted on December 21, 1993, established the transportation tax by temporarily converting the special consumption tax on gasoline and diesel into a purpose tax, based on the principle that the construction funds for roads and subways should be sourced from petroleum products related to the transportation sector and that social costs such as pollution caused by vehicle operation should be borne by the polluters, aligning with the beneficiary-pays and polluter-pays principles. Subsequently, the Transportation Tax Act was renamed the Transportation, Energy, and Environment Tax Act on December 30, 2006, expanding the scope and usage of the transportation tax, and the sunset date originally set for December 31, 1993, has been extended monthly. According to the 2021 tax law amendment announced by the Ministry of Strategy and Finance, its validity is expected to be extended for three more years until December 31, 2024. The education tax and driving-related automobile tax, which have a surtax nature on the transportation, energy, and environment tax, began to be levied under the amended Education Tax Act and Local Tax Act on December 29, 1995, and December 28, 1999, respectively, and continue to this day.

Now marking its 60th anniversary, the fuel tax is a typical indirect tax with low tax resistance and high collection efficiency. However, many problems coexist beneath the surface. First, the current fuel tax system is overly complex, with a mixture of purpose taxes and local taxes, plus education tax and import surcharges, resulting in a multi-layered structure. Although introduced as a temporary purpose tax, it has persisted for more than one generation, causing rigidity in fiscal management. Serious consideration is needed to integrate it into a single general tax item and absorb the levies. Also, due to the nature of the tax being levied at the refinery release stage, consumers who actually bear the fuel tax burden are unaware of its details, and because it is a volume-based tax, the burden does not change whether oil prices rise or fall, reducing elasticity to price fluctuations. Despite differences in social costs between gasoline and diesel, the relatively small gap in fuel tax burdens calls for reconsideration and adjustment of fuel taxes by fuel type.

In the early 1990s, when the Transportation Tax Act was enacted, automobiles were considered luxury goods, and applying a Pigouvian tax to reduce negative externalities was justified. However, according to Ministry of Land, Infrastructure and Transport statistics as of the end of last September, South Korea has 24.78 million registered vehicles, roughly one car for every two people, making it a representative essential good. From a mid- to long-term perspective, it is difficult to maintain the heavy fuel tax burden. On the other hand, as the supply of electric vehicles and other eco-friendly energy sources expands in line with environmental policies, fuel consumption will decrease, and the 20 trillion KRW fuel tax revenue is expected to gradually decline, making it necessary to consider alternative tax sources. As the fuel tax reaches its 60th anniversary, it is a time of transition urgently requiring a clever reform of the fuel tax system that aligns better with the global standard of carbon neutrality while not imposing excessive burdens on the public.

Baek Jeheum, Lawyer at Kim & Chang

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