Korean Carmakers Fear Excise Tax Renewal

The Korean Times reported that with the Korean government weighing arguments for and against the extension of the special automobile excise tax cut period, originally set to expire in June, domestic automakers are working out countermeasures for various contingencies, industry sources said yesterday.

The government first lowered the special excise tax on automobiles last November as a temporary measure to boost the nation's economy.

However, as the Office of the United States Trade Representative (USTR) has asked Korea to reconsider the renewal of the measure, an extension is under investigation.

The Ministry of Foreign Affairs and Trade (MOFAT), for its part, is also calling for the extension of the period, taking relations with the USTR into account, while the Ministry of Finance and Economy (MOFE) wants the tax cut to end as planned to secure more tax revenues.

The two sides will discuss the issue next week and decide whether to extend the tax cut in early June.

Local auto manufacturers are preparing for either possibility.

First, consensus among the automakers is forming that they should collectively urge the government to prolong the cut during the evaluation period.

They will stress that the special excise tax cut has raised local sales by 5 percent and will make a great contribution to easing trade conflicts with the United States as U.S. producers have shared in the sales increase.

The automakers said the government should adjust the existing basic tax rate on cars in Korea at the USTR's request.

Namely, the special excise tax rate of 14 percent applied to large-sized cars should be lowered to 10 percent. The current 10-percent tax rate on medium-sized automobiles should be cut to 7 percent, while the 7-percent tax on compacts cars should be reduced to 5 percent.

The industry sources said local car producers are still debating whether the tax reductions should be made permanent.

If the incentive is extended, they will proceed with existing marketing strategies geared toward selling large- and medium-sized vehicles in the domestic market.

Since the excise tax was cut last November, the sales of large-sized vehicles have outpaced that of compacts. The measure also strengthened domestic consumption vis-a-vis exports.

However, if the tax is fully restored in July as planned, local automakers will focus on exports and switch domestic marketing toward pitches for semi- luxury and compact cars.

They expect demand for compacts to increase, relative to large-sized vehicles, if the temporary tax cut ends.

Meanwhile, as customers scurry to buy cars before the reintroduction of the excise tax on July 1, local automakers are swamped with orders.

Some foreign automakers, including BMW and DaimlerChrysler, are examining ways to bear the special excise tax themselves if the tax cut ends.

Should the full special excise tax return in July, the price of the Hyundai Grandeur XG Q25SE will surge by 1.09 million won literally overnight, and the Equus JS350 will cost an additional 2.38 million won.