[Editorial] Change in tax payment

Consumers pay a 10 percent value-added tax each time they purchase a good or a service, not directly but through the seller. A change in payment would increase the tax collections by up to 7.1 trillion won each year, according to a report from a research institute.

This should be good news to President Park Geun-hye, who says she will make good on her election promise to spend an annual average 27 trillion won on her welfare programs additionally each year without any tax increases. The administration is now tasked with plugging tax loopholes, exposing as large a portion of the nation’s shadow economy as possible to taxation and taking other measures to raise tax revenues and finance her programs.

In a recent policy debate, the Korea Institute of Public Finance proposed to allow consumers making purchases on credit cards to pay VAT to the National Tax Service via the card companies, instead of via the sellers, who add all VAT collected each quarter and transfer the total amounts to the tax office. This change, the institute said, would raise revenues by an amount ranging from 5.3 trillion won to 7.1 trillion won each year.

The institute said the default rate of VAT was 11.3 percent, compared with 9 percent for income taxes and 2.6 percent for corporate taxes. The VAT default rate is so high, partly because the sellers fail to transfer taxes when they are forced to close shop or go bankrupt. The institute said VAT defaulted on or evaded amounted to 11.2 trillion won a year.

The proposed change in VAT collection may begin with purchases made on credit cards, which account for almost two-thirds of the total, the institute said.

But the Ministry of Strategy and Finance, which is not so enthusiastic about the proposed change, says the increase in revenue will not as large as the institute estimates. The ministry says the cost of collecting VAT will increase. Moreover, the ministry says, those self-employed small businesses that are now exempted from transferring VAT would be forced to raise their prices if such exemptions were discontinued.

The increase in VAT revenues may not be as large as claimed by the institute. Still, the institute’s proposal merits serious consideration. The administration is urged to hold public debates on the issue and start the legislation process as soon as possible. No VAT must be left uncollected.