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South Korea Provides Stimulus For Economic Recovery

by Mary Swire,, Hong Kong

13 September 2012

In an attempt to boost domestic economic conditions, and to counteract the effect of the present global uncertainty on its export-driven economy, the South Korean government is to introduce additional fiscal measures worth some KRW5.9 trillion (USD5.3bn).

While the government has maintained its forecast for economic growth in South Korea at around 3% in 2012, some are forecasting lower growth following a marked slowdown in growth in the second quarter, and, consequently, a need for the kind of stimulus to consumer spending envisaged by the new measures.

However, while the government is front-ending its support by providing fiscal incentives of KRW4.6 trillion this year and KRW1.3 trillion next year, and those amounts are greater than had been generally expected, it has been estimated by the Strategy and Finance Ministry that the additional spending from its actions will only raise gross domestic product by 0.06% this year, and by 0.1% in 2013.

The government is to take further action to try and revive the property market in South Korea by providing a total capital gains tax exemption on property purchased this year and sold within the next five years, while it will also reinstate its 50% cut in acquisition tax for properties purchased by the end of 2012.

This means that the acquisition tax on a residential home valued at KRW900m or above will be 2% instead of 4%, while the 2% tax on properties below that level will now be 1%. A previous similar tax cut expired at the end of December last year.

There will also be a temporary overall reduction of 1.5% in the special consumption tax on purchases of automobiles and consumer durables, such as televisions and refrigerators, to encourage further consumer spending. For example, the tax on the purchase of a passenger car with an engine size of less than 2,000cc will be cut from 5% to 3.5%, while that on a car with an engine size above 2,000cc will decrease from 8% to 6.5%.

While the Ministry has confirmed that it has chosen to introduce policies that will have the greatest effect on the economy in the shortest possible time, it has also been suggested that their introduction will make it more difficult to achieve a balanced budget next year.

TAGS: individuals | capital gains tax (CGT) | Finance | tax | economics | business | sales tax | property tax | fiscal policy | gross domestic product (GDP) | budget | manufacturing | Korea, South | tax breaks

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