Specific Tax vs. Ad Valorem Tax
A “specific tax” is a tax that uses a product’s quantity or weight as the basis for taxation. Because of that, it is not affected, no matter how high the price is.
The opposite concept is an “ad valorem tax.” An ad valorem tax is a tax imposed on the price of a good.
Unlike most countries around the world that use a “specific tax” for liquor tax, Korea’s liquor tax is based on an “ad valorem tax.” Therefore, the tax rate is set by alcohol type, and the tax is imposed on the price.
If you look at the Liquor Tax Act as of April 1, 2023, as shown on the Korea National Law Information Center, in the case of takju (unfiltered rice wine), tax is imposed according to the tax rate set each year by Presidential Decree. Yakju (medicinal rice wine), fruit wine, and cheongju (clear rice wine) are charged 30%, and beer is set each year by Presidential Decree like takju. And most importantly, distilled spirits, which include whisky, are taxed at 72% of the price.
When using an ad valorem tax, the distinction between commercial use and home use must be strict. So, in Korea, if a restaurant sells alcohol and then, because it runs short of stock, goes next door to a convenience store to buy and then resells it, that is illegal. On the other hand, in most countries that adopt a specific tax, it is legal for a restaurant to go next door to a mart, buy alcohol, and sell it. This is because, when the liquor tax is ad valorem, the imposed tax is elastic with respect to price, so the state must monitor the distribution process.
For reference, the distinction between commercial/home use for soft drinks exists to secure the distributor’s margin arising from wholesale/retail price differences, whereas the distinction between commercial/home use for alcoholic beverages exists to impose the liquor tax. Because of this, the distinction between commercial and home use for alcohol is clear and has a mandatory nature, so even if what is sold at a mart is sometimes cheaper than the wholesale price, businesses that handle alcohol cannot buy and then resell it.
Reasons for Adopting the Ad Valorem Tax and the Controversy
From here on, what follows may be uncomfortable for people who usually enjoy green-bottle soju. However, to convey this content honestly, I wrote it without adding or subtracting anything.
When you think of Korea’s representative, working-class alcoholic drink, you immediately think of “soju” in a green bottle. But originally, soju was an upper-class drink that ordinary people could hardly even look at. To make soju traditionally, you have to use 1 kg of rice to get 300ml~400ml, which is the size of one bottle of soju today. So, when there wasn’t even enough rice to eat, using 1 kg of rice for a single bottle of alcohol could not be anything but luxurious. Because of this, prohibition edicts were frequent during the Joseon Dynasty.
Then let’s look at the process by which soju became inexpensive. Soju became significantly cheaper through two processes. During the Japanese colonial period, Japan built large-scale soju factories and mass production began, making it cheaper in the first stage. Then, after the severe crop failure of 1963, in 1965, a law was passed that prohibited making soju from major consumption grains like rice and barley, and as the raw material for soju shifted to tapioca, an agricultural surplus, it became cheaper in the second stage. In fact, changing the raw material is, in a way, changing the liquor itself. Therefore, it is fair to say that today’s green-bottle soju is a completely different liquor from the traditional soju of the past.
The ad valorem tax, which is advantageous for low-priced alcohol, was activated starting in 1968. In a sense, it is a liquor tax applied with the nationally popularized green-bottle soju in mind. It has not been that long since Korea escaped absolute poverty. If a large tax had been imposed on green-bottle soju at that time, only a very small number of people would have been able to drink it. That is why, although it is a liquor tax, it was set based not on alcohol but on price.
However, as mentioned earlier, there are many criticisms that, since it is a “liquor” tax, it is wrong to set the tax on price rather than alcohol volume. In fact, there is already a separate item called “value-added tax” for taxes imposed on the price. Value-added tax is a tax imposed whenever you purchase any item. But in the case of alcohol, a separate liquor tax is added. The reason the liquor tax exists is that alcohol is included. It is a tax added because of alcohol, so setting it based on price rather than the amount of alcohol cannot help but be ironic.
The ad valorem tax is just a tax system adopted to reduce the tax burden on green-bottle soju. It shifts the tax burden of green-bottle soju onto expensive alcoholic beverages such as whisky. This harms not only high-end imported liquors, such as whisky, but also traditional Korean liquors that have inherited tradition and culture. Because tax is excessively imposed as costs rise, Korea’s liquor market’s key survival factor is who can produce more cheaply with cheaper ingredients and thus receive less tax. As a result, the structure is one where low-quality alcohol, at a level that is merely drinkable, is mass-produced.
Therefore, not only whisky, but also high-quality alcoholic beverages in which our culture is alive, such as traditional liquors, are in a structure where they cannot survive. Even in the neighboring country, Japan, because it uses a specific tax like most countries, sake, their traditional liquor and a drink that represents the country, could develop brilliantly, and even the varieties of rice each sake brand has can number from dozens to hundreds, to the extent that they are truly serious about sake quality. In contrast, in Korea, because making things cheaply is the structure that leaves profit, unless it became known due to the Korean Wave, low-quality green-bottle soju—embarrassing even to show to foreigners—ends up dominating. There can be controversy, but anyone who has tried various liquors will likely agree on how low the quality of Korea’s green-bottle soju is. Therefore, overseas, alcohol is often regarded not only for the purpose of getting drunk but also as something that creates synergy with food in terms of taste and aroma, so great care is taken with quality, but for Koreans, in most cases, the concept of “alcohol” is set as something you drink just to get drunk.
To summarize, the current ad valorem tax is an ironic tax imposed on price rather than alcohol, it shrinks the market for high-quality alcoholic beverages such as traditional liquors and leads toward becoming a backward country in liquor culture, and although it is a necessary tax to restrain alcohol consumption, it instead strongly supports the supply of green-bottle soju, so the total amount of alcohol consumed is larger than it would be if a specific tax were used.
Future Direction
If Korea maintains the ad valorem tax as it is, as mentioned earlier, it will continuously shrink the traditional liquor market and further make it disappear. If that happens, Korea will not be able to escape being a backward country in liquor culture, where people drink large quantities of low-quality alcohol and have only the purpose of getting drunk. Even compared with the neighboring country, Japan, the difference in liquor culture is large. It is so large that it can be perceived as a difference in class. If you give foreigners Japan’s popular sake and Korea’s green-bottle soju and have them do a comparative tasting, they will surely choose sake. Seeing that, I cannot help but feel regret as a Korean.
Unlike in the past, Korea has escaped absolute poverty. As a result, with more room to breathe, demand for high-quality liquors such as imported liquors, including whisky and traditional liquors, has increased. In addition, as more people seek alcohol not for the purpose of getting drunk but for the purpose of savoring it, Korea should also switch to a specific tax, set taxes based on the amount of alcohol, lower the prices of whisky and traditional liquors to less than half, and develop liquor culture.
I felt very sad when I heard the comment in a video uploaded to the YouTube channel ‘Bimiriya’ that “Koreans do not want to pay more for alcohol than the price of green soju.” When you eat alcohol with food, and it harmonizes, another world opens up. But personally, it is regrettable that the culture of drinking alcohol merely to get drunk persists. Of course, some people say green-bottle soju pairs well with food, but honestly, I suspect that’s less about its inherent quality and flavor and more about habit and nostalgia.
Fortunately, the Korean government also recognizes this. Discussions on revisions related to the Liquor Tax Act have taken place for a long time, and things are changing little by little. It is not that it is immediately changing from ad valorem to specific tax, but recent proposed amendments are lowering taxes for items that previously had large tax rates, enabling them to compete with green-bottle soju. Through this, if many people move from green-bottle soju to decent-quality alcohol like whisky and traditional liquors, and a new culture is led, it will become a stepping stone for moving from ad valorem to specific tax.
However, as the ad valorem system is still maintained, home use and commercial use are strictly separated, and the inconvenience in distribution has not been resolved. In an online article, an industry official said, “Since Korea has joined the ranks of advanced countries, I think it is right to go to international standards.” Along with this, as the MZ generation shows great interest in high-quality liquors such as whisky, going forward, the process of converting the ad valorem tax to a specific tax should be accelerated so that Korea can become an advanced country in liquor culture.