About the tax exemption waiver system for duty-free businesses

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What is the tax exemption system for applying the small business tax rate to tax-exempt businesses?

The Value Added Tax Act allows tax exemption for the supply of certain goods or services listed in the law. Tax-exempt businesses are not required to pay value added tax or issue tax invoices, but are subject to various restrictions, such as not being able to receive input tax deductions.

Accordingly, a system has been established that allows businesses to waive tax exemption and be subject to taxation at their own discretion, even if they are eligible for tax exemption, if certain requirements are met.
This tax exemption system is often chosen for the purpose of securing tax efficiency, especially when seeking to receive a purchase tax deduction through the application of the small business tax rate. In this column, we will look into the requirements for waiving tax exemption under the Value Added Tax Act, the method of reporting, and the effect of tax exemption notation.

Applicable to

According to the Value Added Tax Act, the following tax-exempt businesses may waive tax exemption and be subject to taxation by reporting to the tax office.

① Target of application of small business tax rate according to law

② Lease service of houses and attached land in accordance with laws and regulations

③ Personal services provided by writers, composers or other individuals in accordance with the law

④ Goods or services supplied by organizations for religious, charitable, academic, relief, or other public interest purposes in accordance with laws and regulations.

How to report tax exemption

Suppliers and business operators who meet the requirements for tax exemption must report the tax exemption report containing the information below to the head of the tax office in charge of the business place where the supply is completed and correct their business registration to include tax exemption.

① Personal information of business owner

② Goods or services for which tax exemption is to be waived

③ Other notes

In this case, if two or more tax-exempt businesses are being operated, the business operator may only exempt the supply of goods or services that are subject to tax exemption from the supply of goods or services for which tax exemption is desired. In addition, if a business operator who has exempted only those goods or services subject to the small business rate supplies tax-exempt goods or services domestically, the tax exemption is not effective.

The effectiveness of the cotton swab

If you waive tax exemption, you must fulfill your tax payment obligations as a value-added tax payer from the date you file the tax exemption report. In addition, if you file a tax exemption report, the tax exemption will be excluded from small business transactions for three years from the date of report.

As mentioned above, tax-exempt business operators can apply for exemption of tax for the small business rate transactions through the tax-exemption provision under the Value-Added Tax Act, and can deduct the purchase tax related to the small business rate application. However, the business registration correction is required as a concurrent tax-exempt business operator, and the small business rate application portion is considered a value-added tax business operator, and therefore, a value-added tax report obligation arises. In addition, in the case of purchase tax commonly used in tax-exempt businesses, the deduction amount must be calculated according to the apportionment provisions. Therefore, it is necessary to comprehensively consider the business structure and purchase scale, etc. to review whether the tax-exemption provision is actually beneficial.

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