Compact Car Sales Jump 23% Amid Triple Highs... KDI Urges Maintaining Excise Tax Refund but Overhauling with Fuel Efficiency and Income Criteria

As the so-called "triple highs" of persistent inflation, high interest rates, and a strong won-hit exchange rate continue, sales of compact cars in Korea are surging. In this context, there is heightened debate over the restructuring of the "300,000 won annual fuel tax refund" system. While the government has submitted a tax law revision to the National Assembly that would extend the sunset clause by three years to 2029 to keep the system in place, the Korea Development Institute (KDI), a national policy research institute, has argued that a “targeted overhaul” is necessary, including adding criteria such as fuel efficiency and income.

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Compact Car Sales Surge 23% Amid Triple Highs

According to the Korea Automobile & Mobility Association (KAMA) on September 16, as of the end of July this year, domestic compact car sales reached 44,961 units, marking a 23.3% increase compared to the same period last year (36,463 units). This stands in stark contrast to the overall passenger car market: while total passenger car sales dropped by 2.2%, most vehicle categories saw a decline—subcompact sedans fell by 21.1%, large sedans by 4.6%, and SUVs by 5.0%. Compact cars’ share of the total passenger car market also rose from 4.6% to 5.8%. However, the overall trend for compact car sales has been downward. After peaking at 202,000 units in 2012, sales fell to an all-time low last year. Although the launch of the new “Casper” in 2021 led to a roughly 40% rebound in sales in 2022, reaching 133,000 units, numbers declined for three consecutive years afterward: 120,000 in 2023, 89,000 in 2024, and 65,000 projected for 2025. Last year’s numbers represent a 68% drop from the 2012 peak.

Due to the tough remarks by U.S. President Donald Trump, international oil prices are soaring. On April 3, 2026, a gasoline and diesel price notice was placed at a gas station in Yongsan-gu, Seoul. Photo by Dongjoo Yoon

Government Announces Three-Year Extension for 2.1 Million Beneficiaries of the Compact Car Excise Tax Refund

Compact cars, which fall in the 13–14 million won price range, benefit from acquisition tax reductions, 50% discounts on expressway tolls, and public parking fees. Owners of compact cars with engine displacements under 1,000cc are eligible for an annual fuel tax refund: 250 won per liter of gasoline or diesel, and the full Individual Consumption Tax amount for LPG vehicles, up to a limit of 300,000 won per year. The refund limit rose from 100,000 won in 2017 to 200,000 won, and then to 300,000 won in 2022. This tax benefit was originally due to expire at the end of December this year. However, since about 2.1 million people currently receive these benefits, and the refund total will reach 62.3 billion won this year, the government is moving to extend the program. The Ministry of Economy and Finance recently submitted a revision to the Restriction of Special Taxation Act proposing to extend the program’s expiration date by three years, until December 31, 2029. The amendment would also allow a refund for only one vehicle in households that own two compact cars as a result of marriage.

KDI: “Eligibility Should Be Refined With Fuel Efficiency and Income Criteria”

The Korea Development Institute, however, points out that “even though the government tripled the annual refund limit, the effect of the 2022 increase lasted only about five months,” noting that “expanding support alone failed to offset the structural decline driven by increasing SUV preference.” KDI further highlights that 43.5% of beneficiary households earn over 5 million won per month. It also notes that since eligibility is based solely on engine displacement (under 1,000cc), even compact cars with lower fuel efficiency than hybrids receive support, which undermines the national goal of carbon neutrality. KDI has therefore suggested that eligibility should include fuel efficiency and carbon dioxide emissions criteria.

KDI explains, “To ensure alignment with the national goal of reducing greenhouse gas emissions, the program should be limited to compact cars that either exceed a certain fuel efficiency threshold or have low greenhouse gas emissions.” The institute also proposes introducing income requirements: “Since the original intent of the policy is to ease fuel costs for low-income households, benefits should be concentrated on households earning below a certain level, as determined by comprehensive income tax standards.”

This content was produced with the assistance of AI translation services.