Musical instrument wholesalers in, retailers out; ISA to be reviewed within broader system framework

An advertisement for an ISA product displayed outside a brokerage branch in Seoul. [Yonhap]
An advertisement for an ISA product displayed outside a brokerage branch in Seoul. [Yonhap]

The National Assembly's Finance and Economy Planning Committee warned Sunday that the government's plan to raise the cap on the family business inheritance deduction from 60 billion won ($45.3 million) to 100 billion won could deepen the regressive nature of the tax system.

The committee also raised concerns that replacing the childbirth tax credit with direct fiscal support could undermine the stability of payments.

According to the National Assembly, the committee completed a legal review report on tax-related legislation late last month.

The report focused on the wealth redistribution function of inheritance taxes, warning that raising the deduction ceiling "could further weaken the redistributive role of the inheritance tax by providing additional tax relief to high-net-worth individuals." It added that the benefits of the higher cap would flow to heirs of large businesses and those inheriting assets exceeding the current 60 billion won limit, "which could deepen the regressivity of the tax system."

The government's tax reform bill, announced in August, significantly tightened the eligibility requirements and screening process for the family business inheritance deduction while raising the cap from the current maximum of 60 billion won to 100 billion won. The new ceiling is calculated at 2 billion won per year of management by the deceased, up to a maximum of 100 billion won for businesses operating 50 years or more — a measure aimed at dramatically expanding support for long-established companies.

The committee also noted that the bill defines eligible family businesses as "companies possessing specialized technology and management know-how," a standard it said was subjective and insufficiently clear, raising concerns about predictability.

The report further said the bill's enumeration of eligible industries could invite questions about fairness and the rationale for sector selection, as some industries within the same top-level classification were included while others were excluded. For example, musical instrument wholesalers qualify for the deduction, but musical instrument retailers do not — even as other retail categories, such as men's and women's outerwear retailers, remain eligible.

The government's broader tax reform package seeks to overhaul tax expenditures and convert some programs into direct fiscal support, on the grounds that income and tax deductions tend to be less accessible to low-income earners and those exempt from taxation. The childbirth tax credit is a prime example. The committee acknowledged that converting it to fiscal support "could reduce regressivity compared with tax expenditures and enhance income redistribution effects, since fiscal support would also benefit low-income earners who are exempt from taxation."

The committee also noted that fiscal support can be delivered more quickly than tax relief processed through year-end settlements or comprehensive income tax filings, allowing for more timely assistance with the financial burden of early parenthood.

However, it cautioned that fiscal programs are subject to changes in scale depending on economic and fiscal conditions and policy priorities, which could make support less stable than tax-based measures.

The committee expressed particular concern about the sustainability of the childbirth support program, noting that next year's budget proposal transfers it to a youth account under a future response fund.

"Childbirth support payments are a program in which new disbursements recur every year for each newborn, while installment payment obligations to existing recipients continue," the report said. "Because fund inflows are sensitive to tax revenue conditions while support demand is ongoing, it is difficult to judge whether stable future payments can be ensured based solely on the scale of fund accumulation during periods of economic expansion."

The report also flagged that converting to fiscal support would entail administrative costs, as it requires handling applications, eligibility verification, disbursements, duplicate and erroneous payment checks, and clawbacks.

On the recently contested question of whether to delay the taxation of virtual assets, the report stopped short of taking a direct position, instead laying out the arguments on both sides.

Proponents of a delay argue that a deferral period is needed to accurately track transaction histories and acquisition costs for virtual assets, and to give taxpayers and businesses time to adapt to reporting and documentation requirements. They also say regulations need to be established for an expanding range of transaction types — including staking rewards and income from decentralized finance, or DeFi — and that taxpayer acceptance of the new levy must be improved. As of the end of last year, about 11.13 million tradeable accounts had been recorded.

Those in favor of proceeding with taxation as scheduled from Jan. 1 next year cite the need for predictability and credibility in tax policy, the principle that income should be taxed wherever it arises, and the importance of tax equity, the report said.

As part of the tax reform, the government plans to introduce a "productive finance" individual savings account, or ISA, that would exempt all interest and dividend income from taxation for investments in domestic assets.

The committee said the new ISA "could expand long-term investment demand in the domestic capital market by directly linking tax benefits to investment in domestic assets."

However, it cautioned that combining tax-exempt benefits with long-term contract extensions could concentrate advantages among account holders with greater financial capacity.

For general ISAs, the average investment amount as of the end of last year stood at 6.32 million won, and accounts with cumulative investments exceeding 80 million won accounted for just 0.7 percent of the total, while 55.2 percent held 10,000 won or less. As a result, the committee said, raising the contribution ceiling to 200 million won ($151,000) would deliver no meaningful benefit to the vast majority of account holders, with the gains concentrated among the small share of subscribers able to take advantage of the higher limit.

The additional income deduction benefit under the youth-type productive finance ISA is also inaccessible to young people with no or low taxable income, and in fact becomes more valuable the higher one's income, the report noted.

"Offering higher tax benefits than the general ISA risks blurring the functions and roles of the two products," the report said, recommending that rather than treating them as separate regimes, policymakers should adjust the policy objectives, investment scope and level of tax benefits within the overall ISA framework.


oskymoon@heraldcorp.com