As the market for Chinese electric vehicles intensifies in South Korea, calls are growing for the government to overhaul its tax support system for eco-friendly vehicles. Critics argue that while tax benefits for purchasing electric vehicles are being reduced, the exclusion of completed electric vehicles from domestic production tax credits could undermine the price competitiveness and production base of the domestic automotive industry. In response, the government has initiated discussions on ways to enhance the domestic production tax credit.
According to the Ministry of Finance and the National Assembly, the government plans to gradually reduce tax benefits related to the purchase of electric and hydrogen vehicles through this year's tax reform. Additionally, the exemption on individual consumption tax for hybrid vehicles will be phased out. This move aims to decrease the tax support provided at the purchasing stage to promote the wider adoption of eco-friendly vehicles.
The issue lies in the misalignment with the tax system designed to support domestic production. Starting next year, the government intends to introduce domestic production tax credits for six key sectors, including solar energy, wind energy, secondary batteries, semiconductors, core materials, and AI robot components, but completed electric vehicles will be excluded from this initiative. Unlike existing tax credits for research and development (R&D) or facility investments, this new system is characterized by its direct support for actual production based on the quantity produced and sold domestically.
Industry representatives argue that maintaining the production base for electric vehicles is crucial for the competitiveness of the entire industry, as electric vehicles are closely linked to the battery and key component sectors. With Chinese companies expanding their market presence by leveraging price competitiveness, the absence of support for domestically produced electric vehicles could put local manufacturers at a disadvantage. If purchasing support is also reduced, there may be insufficient policy measures to sustain both demand and supply in the domestic electric vehicle market.
The Korea Chamber of Commerce and Industry recently suggested in a report to the National Assembly that electric vehicles and low-carbon steel should be included in the domestic production tax credit program. The proposal emphasizes the need for support not only for investments but also for actual production to strengthen the supply chain.
Legislative efforts are also underway in the National Assembly. On October 16, 19 lawmakers from both parties jointly proposed an amendment to the Tax Special Cases Limitation Act to include electric vehicles in the domestic production tax credit program. On October 26, the necessity of processing this bill in the November session was raised.
The government has begun its review process. Deputy Prime Minister and Minister of Finance Lee Hyung-il held an economic policy meeting on October 25 to discuss ways to enhance the domestic production tax credit. He is expected to visit the automotive industry in early November to gather opinions from stakeholders. The review will likely focus on the need for support for electric vehicle production and the potential effects of expanding tax benefits.
However, the relationship between the expanded tax credit and existing investment support remains a contentious issue. Since the domestic production tax credit is limited in its overlap with the integrated investment tax credit, there are calls to design the overall system to encourage both corporate investment and production.
A Ministry of Finance official stated, "The Deputy Prime Minister has mentioned the need to revisit the domestic production tax credit, and we plan to gather opinions from various stakeholders, including experts and industry representatives. We will strive to prepare enhancement measures before the tax subcommittee concludes next month."
* This article has been translated by AI.
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