Same ₩80M in sales, why is the VAT different? — the subtraction shop and the multiplication shop

Two restaurants on the same street with identical sales of ₩80M a year, VAT included. One pays about ₩1.03M in VAT a year; the one next door pays about ₩4.27M. The food is not different and neither is the business sense. The only difference is one line on the business registration: simplified taxpayer or general taxpayer.

The law sets the threshold for that line by sales and re-checks it every year. Simplified VAT applies to sole proprietors whose prior-year supply value (annual sales including VAT) falls short of ₩104M. Corporations are never eligible. But the owner does have choices. When starting a business expected to stay under the threshold, you declare simplified status at registration (Act Art. 61(3)(4)), and even an eligible business can waive simplified status and choose general taxation (Act Art. 70). A waiver generally blocks a return to simplified status for 3 years.

There are several exceptions. Real-estate leasing and taxable entertainment venues have a separate ₩48M threshold. The Decree lists businesses that cannot use simplified VAT at all by industry, size and location, and people who already own another non-eligible business, or whose combined sales across businesses exceed the threshold, are excluded. The ruling is not one-off, and a changed status applies **from 1 July of the following year** (Act Art. 62(1)). It is remade every year on prior-year sales, and the tax office decides your status and notifies you.

A general taxpayer's calculation is subtraction: output tax collected from customers minus input tax paid on ingredients, rent and the like (Act Art. 37). Output tax is 10% of the supply price before VAT, so if you took in ₩80M including VAT, the output tax inside it is ₩80M × 10/110 = ₩7,272,727 (about ₩7.27M). Assuming ₩33M of purchases including VAT, with ₩3M of input tax, ₩4,272,727 is due. More purchases mean less tax, and if input tax exceeds output tax the difference is refunded.

A simplified taxpayer's calculation centers on a multiplication: supply value × the industry's value-added ratio × 10% (Act Art. 63(2)). The ratios are in a Decree table, and retail and restaurants are at 15%. ₩80M × 15% × 10% = ₩1.2M. For purchases, only 0.5% of the VAT-inclusive amount backed by tax invoices and the like is credited (Act Art. 63(3)): on the same ₩33M that is ₩165,000, leaving ₩1,035,000 due. It barely asks what your purchases were; an industry average stands in. The card-sales tax credit (Act Art. 46) is available to both types, so it is left out of both.

So the smaller your purchases, the more the simplified regime favors you, and a purchase-heavy business can actually lose under this formula. And for a simplified taxpayer, credits beyond the tax due are treated as not existing (Act Art. 63(6)), so there are no refunds. In a year of heavy fit-out and equipment spending, a general taxpayer recovers that input tax; a simplified taxpayer does not.

Inside the simplified regime there is one more line. If supply value for the tax period is under ₩48M, the payment obligation itself is waived. A small shop with ₩40M in annual sales pays ₩0 of VAT. But this removes the tax, not the obligations: you still file, you still must be registered, and missing the registration deadline draws a non-registration penalty even in the waiver band.

If simplified VAT were always better the law would have no reason for a threshold. The price comes in three parts. First, no refunds. Second, a simplified taxpayer whose prior-year supply value was under ₩48M, or who is in a first simplified tax period as a new business, issues receipts instead of tax invoices (Act Art. 36(1)2). A business customer needs a tax invoice to claim its input credit, so you can lose business-to-business clients. Third, the purchase credit is narrower: a simplified taxpayer gets only 0.5% of purchases, not the full input-tax credit a general taxpayer gets.

Two axes decide it: how large your purchases are, and whether your customers are consumers or businesses. A consumer-facing business with small purchases gets the most from simplified status; a business-to-business or investment-heavy operation may fit general status better. Even an eligible business can opt into general status through the simplified-VAT waiver. But after a waiver you generally cannot return until the tax period containing the day 3 years on (Act Art. 70(3)), though businesses with prior-year supply value of ₩48M up to under ₩104M, among others, can declare simplified status again sooner (Art. 70(4)).

If you are about to start, you decide at business registration whether to declare simplified status, so size up the initial investment first. If you already run a shop, check your status (registration certificate, Hometax) and this year's sales trajectory. Near the threshold your status can flip next year, and with it both the calculation and your tax-invoice duties. The transition year has its own inventory and purchase settlement rules, so talk to a tax adviser before it arrives.