Abstract

The financial and insurance industry is one of the major industries in the country considering the proportion of GDP or its relationship with other industries. But this whole industry is exempted from VAT. While VAT is levied on ordinary necessities such as ramen, the fact that VAT is exempted to this major industry is questionable. Lots of precedent studies have been made on the VAT taxation on financial services. The most important issue is whether taxation is possible on interest. The result of this study shows that the VAT taxation on interest has sufficient persuasive power. The purpose of this paper is to present the argument of VAT taxation on financial services and to analyze the tax revenue and its effects when VAT taxation is imposed on Korean banks. According to the results of the analysis, total tax revenue increases by 2,298.9 billion won, and banks are able to refund a VAT of 628.3 billion won for the goods expenses. The economic effect of the taxation transition is that there is petty negative incidence in the tax burden of the household income quintile, there is no effect on the deposit interest rate, and the interest rate on the loan is likely to rise by the tax rate on the interest rate on households and tax exempt companies. The results show that there is no effect on deposit transactions, no effect on the demand for lending of the taxable firms, and negative effects on household loans, but very limited in its effect. When converting financial services into taxation, the household sector should pay most of the increase in tax revenues, and the fact that the household income quintile is inverted nature, though not significant, is a burden for taxation. However, under the current low interest rate, the tax burden per household is unlikely to be large. It would be desirable to relax the tax burdens that the household sector should bear additional burdens, and to apply the reduced tax rate to the household sector for the soft landing of the system.

Keywords

• financial service
• VAT
• tax exemption
• policy norm
• Korean banks VAT

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