Capital gains tax reform feared to cut annual tax income by W1 tril.
Dealers watch monitors while trading in the dealing room of Hana Bank in central Seoul, Wednesday, with electronic signboards showing the benchmark KOSPI and the won-dollar exchange rate. Yonhap
The government stands to lose 1 trillion won ($765.2 million) in tax revenues annually should it decide to abandon a proposed capital gains tax on returns from financial investments, a main opposition party lawmaker warned, Wednesday.
The forecast adds concerns about a decrease in tax revenues, in contrast to retail investors who welcome the reduced tax burden.
Citing data from the National Assembly Budget Office, Rep. Yang Kyung-sook of the Democratic Party of Korea (DPK) forecast that if the government scraps the aforementioned tax scheme, the amount of tax that would not be collected from 2025 to 2027 will reach 4.33 trillion won.
“Simply put, the tax revenue shortfall will widen by more than 1 trillion won annually over the three years if the government abandons the proposed capital gains tax on returns from financial investment income,” the lawmaker explained.
The forecast came a day after President Yoon Suk Yeol pledged to drop the planned capital gains tax on income from financial investments, in a series of measures aimed at boosting investor sentiment and stock prices.
The capital gains tax scheme was supposed to take effect in 2023 following the National Assembly's approval of the relevant bill in 2020, but was postponed for two years after Yoon became president in 2022.
The plan is to impose at least a 20-percent tax if annual capital gains from stock investments exceed 50 million won.
Investors who earn more than 2.5 million won from other financial assets, too, would also be subject to taxation.
Yoon’s pledge was welcomed by the capital market, as about 150,000 retail investors, including 2.5 percent of the nation's total stockholders, could be required to pay the levy.
At the same time, the pledge heightened concerns of a shortfall in tax revenue, which was estimated to be around 60 trillion won in 2023.
The shortage is expected to continue in 2024 and further complicates the Yoon administration’s bid to tackle the debt-to-GDP ratio, which surpassed 50 percent in 2023.
According to the International Monetary Fund (IMF), the ratio could be near 58 percent by 2028, which will be the second-highest among non-key currency countries.
“Under the circumstances, the government is undermining its own credibility by deviating from established norms in handling a policy that has been subject to compromise with rival parties,” Yang said.
She also criticized the Yoon administration for “lacking measures to cover the shortfall in national income.”
Meanwhile, Hyundai Research Institute economist Lee Hyung-suk said scrapping the capital gains tax on financial investment income can result in “a cycle of improvement for investor sentiment, stock market rally and private spending.”
The economist noted that the government already eased a separate capital gains tax rule on those grouped as large shareholders.
Effective Jan. 1, the government raised the threshold — from 1 billion won to 5 billion won — in levying capital gains taxes on investors who hold the corresponding value of listed stocks in a single company.
The relaxed threshold is also applied to those whose stake exceeds 1 percent of total shares listed on the benchmark KOSPI or 2 percent of total shares listed on the secondary Kosdaq market.