[2023 Tax Reform] Finally Abolishing the Inflation-Linked System That Raises Beer Prices

원본보기 아이콘

The government will abolish the ‘beer and takju specific tax price linkage system,’ under which taxes automatically increase every year according to the consumer price inflation rate, and introduce a ‘flexible tax rate’ system where the government applies tax rates only when necessary. The price linkage system, designed to mechanically raise taxes annually, was judged to have given the liquor industry an excuse to raise prices.

According to the government’s ‘2023 Tax Reform Proposal’ on the 27th, the government will amend the Liquor Tax Act to abolish the current specific tax price linkage system applied to beer and takju and switch to a flexible tax rate system.

The specific tax is a system where taxes are levied in proportion to the quantity of liquor or the amount of alcohol contained. Korea maintained an ad valorem tax system based on liquor prices for over 50 years since 1968, but introduced a specific tax only for beer and takju in 2020 to resolve tax inequality issues with imported beer.

However, since the specific tax system levies taxes based on the quantity of liquor, it has the limitation of being difficult to reflect situations where prices rise but the annual shipment volume of products remains largely unchanged. Therefore, the government has applied a price linkage system to the specific tax to compensate for this structural limitation. A ‘price fluctuation index’ adjusted within ±30% of the previous year’s consumer price inflation rate is set, and this is multiplied by the previous year’s tax rate to determine the new tax rate annually. This allows taxes to automatically increase when prices rise.

The problem lies in the structure designed to raise beer and takju liquor taxes annually according to price inflation, which triggers price increases by liquor companies. Liquor companies use the tax rate as an excuse to raise the shipment price. Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho explained, “According to the price linkage, the liquor tax on one can of beer changes by about 10 to 20 won, but the industry uses this as an excuse to raise prices by 500 to 1,000 won,” adding, “We judged that there is no need to create an excuse every year in the tax system to raise liquor prices.”

Accordingly, the government explained that it will abolish the current price linkage system that mandates annual adjustment of liquor tax rates according to consumer price inflation. Going forward, the Liquor Tax Act will stipulate a basic tax rate, but through enforcement, a flexible tax rate within ±30% of the basic tax rate will be adjusted irregularly. The National Assembly will set the statutory basic tax rate in the Liquor Tax Act, and the government will be able to adjust the flexible tax rate within 30% of the basic tax rate as needed under the enforcement decree. Therefore, even if prices generally rise, if liquor prices do not change, the tax rate can remain the same.

The temporary tax reduction benefit for draft beer will also have its application period extended. Currently, a 20% tax rate reduction benefit is given for draft beer until the end of 2023 following the 2020 switch to specific tax under the Liquor Tax Act, and this will be extended for three more years until the end of 2026.

© The Asia Business Daily(www.asiae.co.kr). All rights reserved.