Market Rout Reignites Concerns Over South Korea Investment Tax

A stock market rout that wiped $140 billion off South Korea's KOSPI index on Monday may accelerate the government's efforts to scrap a proposed tax on stock trading income amid concerns of a market dominated by retail investors.

President Yoon Suk Yeol has been trying to secure approval from the main opposition party for his plan to eliminate the tax, which would impose a levy of at least 20 per cent on trading income from stocks and bonds if annual capital gains exceed 50 million won ($36,325) from 2025.

"Any new tax at this point would be absolutely absurd," said Oh Jeong-min, 42, a retail investor who lost nearly 10 per cent of his portfolio in domestic and U.S. shares on Monday.

"We once again saw how vulnerable the Korean market was when the U.S. sneezes," said Oh, referring to how a rise in the U.S. unemployment rate to a near three-year high spooked markets. 

This week, a blog run by opposition Democratic Party lawmaker Jin Sung-joon, who supports the tax bill, was flooded with critical comments from retail investors, who account for around two-thirds of domestic trade.

"(Monday's) crash revealed the painfully weak supply and demand situation of the domestic markets. The financial investment tax will put a nail in the coffin, is this how you want to ruin the market?" one post read.

Democratic party lawmakers contend that the proposed tax is fair, affecting only about 1 per cent of the 14 million retail investors.

Jin at a May 10 policy meeting had said that such a tax has been successfully introduced in Germany and Japan and helped stabilise their financial investment systems.

However, following the KOSPI's 8.8 per cent slump on Monday, the Democratic Party cancelled a public debate on the tax scheduled for Wednesday, according to the office of lawmaker Lim Kwang-hyun, who also backs the tax.

Yoon's office on Wednesday issued a statement once again urging parliament to accelerate the discussion to abolish the bill as "it is undesirable for the bill to hang over uncertainties when the majority of the public agrees that the tax should be scrapped."

Han Dong-hoon, leader of the ruling People Power Party, said in televised remarks on Tuesday that sticking to the tax plan would be like "creating a perfect storm and walking into it ourselves".

The tax is slated to take effect from 2025 unless the opposition Democratic Party bloc, which holds a majority in parliament, revokes or amends the bill.

"Given the meltdown we saw, the opposition may agree to delay the introduction of the tax," said Kevin Choi, head of ANDA Asset Management in Seoul.

"They should acknowledge that stock investment is a channel to boost people's wealth at a time when the domestic stock market has been underperforming compared to its global peers."

The KOSPI has lost 3.4 per cent so far this year, underperforming the S&P 500 and Nikkei, which are up 10 per cent and 5 per cent, respectively.