Extended fuel tax cut adds to concerns over tax revenue shortage

A signboard at a gas station in Seoul shows gasoline prices at 1,649 won ($1.24) per liter, diesel prices at 1,549 won and premium gasoline at 1,879 won, Wednesday. Yonhap

The government's decision to extend a years-long tax cut on fuel for cars by an additional two months is fueling concerns over a significant shortfall in tax revenue.

The Ministry of Economy and Finance announced, Wednesday, that it will extend the tax cut on gasoline, diesel, and liquefied petroleum gas (LPG) until the end of October. The extension comes after the tax relief was initially set to expire on Aug. 31.

During the extended period, the 20 percent tax cut on gasoline will remain unchanged, while the 30 percent discount on taxes for both diesel and LPG will also continue.

This will be the 11th consecutive extension of the measure since its initial implementation in November 2021, aimed at supporting businesses and individuals affected by the pandemic.

The extended tax discount is intended to address rising tensions in the Middle East, which are negatively impacting global oil prices, and to counteract persistent inflation in Korea.

However, the measure will come at the cost of a reduction in taxable income, which has worsened under the relaxed tax regulations implemented after President Yoon Suk Yeol took office in May 2022.

The relaxed tax rule is based on the belief that it will benefit businesses, which are expected to increase investments in line with Yoon’s economic vision of private sector-driven growth.

“The fuel tax represents a significant portion of tax revenues, particularly at a time when the government is grappling with a revenue shortfall and cannot allocate funds for public welfare,” said Jung Ho-chul of the Citizens’ Coalition for Economic Justice (CCEJ), a civic activist group.

Citing data from the finance ministry in June, Jung highlighted that the government has been collecting an average of 500 billion won ($374 million) less per month since the fuel tax cut was introduced in November 2021.

Jung also pointed out that the government collected 344.1 trillion won in taxes in 2023, falling 56.4 trillion won short of its forecast of 400.5 trillion won.

The 56.4 trillion won shortfall was the largest on record, driven by weak corporate activity and a slump in the property market. Additionally, the maximum corporate tax rate was reduced from 25 percent to 24 percent during the same year.

The government is expected to face another shortfall in tax revenue in 2024 due to further easing of taxes on inherited wealth, families with multiple children, newlyweds, and other areas.

Some financial sources speculate this year’s tax shortfall is estimated to be nearly 10 trillion won, but can increase up to 20 trillion won depending on the condition of the economy in the second half.

In particular, the relaxed tax rule on inherited wealth is expected to reduce tax revenues by approximately 4 trillion won.