November 21, 2024

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An electronic board at a dealing room of the Hana Bank headquarters in Seoul shows the Kospi ending at 2,588.97 points, up 1.83 percent from the previous trading day on Monday. (Yonhap)

 Korea’s main opposition party reversed its plan to introduce capital gains taxes on financial investment income on Monday, putting an end to a four-year stalemate with the ruling party as the underperforming domestic stock market struggles to make a breakthrough.

“We decided to agree to the abolishment of the capital gains tax, which the government and the ruling party have been pushing for,” said Rep. Lee Jae-myung, the leader of the main opposition Democratic Party, during the party's supreme council meeting.

“According to principles and values, it would be right to push ahead (with the implementation of the tax scheme) even if it involves pain, but the Korean stock market is currently in a very difficult situation. We had to consider the position of the 15 million stock investors who have invested and are counting on it,” Lee said.

The ruling People Power Party hailed the decision. Floor leader Choo Kyung-ho said his party will immediately begin talks with the opposition to handle the abolition of the tax at the plenary session in November.

The Yoon Suk Yeol administration has been pushing to repeal the introduction of the financial investment income tax, which would levy a 20 percent tax on capital gains of over 50 million won ($36,500) and a 25 percent tax on earnings exceeding 300 million won from financial investments, including stocks, bonds, funds and derivatives.

The plan won bipartisan support in the parliament in 2020 but its implementation was postponed until Jan. 1 next year due to an outcry from retail investors.

While the ruling party has been insisting on the abolition of the capital gains tax as a burden on investors and an impediment to market advancement, the opposition party has argued that it should be introduced as planned, saying such a move would only favor the rich.

With just two months before the introduction of the levy, investors remained bewildered as the two parties were torn between implementing and abolishing the tax.

The Democratic Party leader’s decision comes as the Korean government seeks to revitalize its undervalued stock market with a growing number of Korean retail investors ditching domestic stocks for promising US stocks like Nvidia and Tesla while its Asian peer markets outperform.

The benchmark Kospi’s performance so far lags far behind other major stock markets.

“For various reasons, the Korean stock market is the only one showing a downward curve while global stock markets are on an upward trend,” the Democratic Party chairman said.

As of Oct. 20, the Kospi had gained 0.26 percent this year while US Dow Jones, Nasdaq and S&P 500 had jumped 11.73 percent, 26.01 percent and 22.57 percent, respectively. Japan’s Nikkei 225 climbed 17.99 percent during the same period.

“The decision to scrap the tax is expected to stimulate the Korean equity market by clearing the uncertainties surrounding its possible implementation,” said Seo Ji-yong, an economics professor at Sangmyung University.

The move would perk up individual investors who have been shunning their home market, Seo said, adding that institutions and foreign investors would also view the tax repeal as a positive factor for the Korean market.

As of 2:20 p.m., the Kospi had risen 1.41 percent for the day to 2,549 points, with institutions and foreigners buying 196.8 billion won and 8.2 billion won, respectively.

Rhee Jong-hoon, a political commentator, said Lee’s decision to repeal the tax plan is intended to attract support from centrists and conservatives by differentiating himself from his Democratic predecessors.

“Ultimately, it is an expansion strategy to reach out to centrists by showing that Lee Jae-myung can do what the Democratic Party previously could not do,” he said.

By Park Han-na (hnpark@heraldcorp.com)