The automotive industry, particularly manufacturers of finished vehicles, is closely monitoring the potential changes in vehicle taxation criteria. The primary focus of these discussions revolves around the proposal to shift towards taxing vehicles based on their market value. This shift is raising concerns because it could negatively impact the sale of relatively expensive electric cars.
According to automotive industry sources on Sept. 14, the presidential administration recommended to relevant ministries and agencies to replace or supplement the current vehicle property tax criteria, which previously relied on engine displacement, with other standards, such as vehicle market value, a day earlier.
Previously, the presidential administration introduced the topic of public debate, citing concerns that the automobile property criteria used for automobile taxes and basic livelihood qualification did not keep pace with societal changes driven by the promotion of electric vehicles, being predominantly based on engine displacement. In the vote results, out of a total of 1,693 votes cast, 86 percent, or 1,454 votes, expressed support for the “improvement of engine displacement-centered automobile property criteria,” with the most common alternative being “vehicle market value criterion.”
The most significant challenge that arises with vehicle market value as the criterion is its impact on electric cars. Until now, electric vehicles have been provided with various incentives, including tax benefits, due to their promotion as eco-friendly vehicles. Under the current automobile tax system, which relies on “engine displacement” as the basis, electric car owners paid only 100,000 won (US$75.24) per year in vehicle taxes, including education tax, totaling 130,000 won.
However, the taxes to be paid would increase significantly if the criterion shifts to vehicle market value. Electric cars are still relatively expensive compared to their internal combustion engine counterparts, primarily due to factors such as battery costs. One of the most significant reasons people invest in electric cars, despite their higher up-front costs, is the expectation of “lower operating expenses.” This reason could cease to hold true if the tax advantages are removed.
An industry insider in the automotive sector said, “Electricity bills have already increased significantly, and it appears they will continue to rise. If taxes on electric cars also increase, the incentives for purchasing electric cars in the current landscape will diminish. Charging infrastructure is still inconvenient, and with the prospect of higher taxes, the demand for electric cars is likely to decrease significantly.”
This could pose a hurdle to the government’s policy of expanding the adoption of eco-friendly vehicles. The industry insider argued, “Considering environmental concerns, taxes on electric cars should ideally be lower than those on internal combustion engine vehicles. While we may reconsider the taxation as electric car adoption becomes more widespread, we are currently in a stage where expansion is still necessary.”
Electric car sales have already seen a sharp deceleration. According to data from the Ministry of Land, Infrastructure, and Transport, the first half of this year saw 78,466 newly registered electric vehicles, marking a modest 13.7 percent increase compared to the same period last year when 68,996 units were registered. This growth stands in stark contrast to the substantial 75.3 percent increase observed in the first half of 2022 and an even more significant 81 percent surge during the same period in 2021. Consequently, automobile manufacturers are attempting to boost electric car sales through discounts, but even this strategy proves challenging.
In a report titled “Recent Discussions on Motor Vehicle Tax Reform,” Kim Pil-heon, a researcher at the Korea Institute of Local Finance, has raised concerns about using vehicle prices as a tax criterion in recent discussions on car tax reform. He pointed out that while taxing based on vehicle price may enhance tax equity, it might disproportionately burden environmentally friendly vehicles, which goes against environmental policies. Kim suggested, "It is desirable to establish a mixed indicator that takes into account both property tax characteristics and environmental cost aspects, rather than relying on a single criterion for motor vehicle tax assessment.”