SEOUL, May 29 (Korea Bizwire) — South Korea’s bourse operator said Wednesday that a tax cut for stock trading will come into effect later this week, with analysts expecting the reduction to revitalize stock transactions, although there may be no sharp rise in trading volume in the long term.
Starting Thursday, the transaction tax for shares listed on the benchmark KOSPI and secondary KOSDAQ markets will be lowered by 0.05 percentage point to 0.25 percent each. The tax for stocks listed on the tertiary KONEX market will be cut by 0.2 percentage point to 0.1 percent, according to the Korea Exchange.
South Korea reintroduced the tax scheme in 1978, after having abolished it in 1971, following its initial adoption in 1963.
The transaction tax is imposed regardless of whether an investor logs a profit or loss, which has angered investors who suffered heavy losses last year amid sluggish stock markets.
South Korea cut the transaction tax for stocks listed on the KOSPI market by 0.05 percentage point in July 1995. In April 1996, the tax was again lowered by 0.15 percentage point to 0.3 percent.
If history is any guide, Thursday’s cut will increase trading volume.
According to data from the bourse operator, the average daily turnover of the KOSPI market rose to 645 billion won (US$540 million) in the first three months after the 1995 cut, compared with 326 billion won in the final three months before the cut.
However, the average daily trading volume fell to 421 billion won between October 1995 and March 1996.
Since the second tax cut in 1996, the average daily trading turnover grew to 680 billion won between April and June 1996, but fell to 437 billion won between July and December 1996.
Won Jae-woong, a researcher at NH Investment & Securities, said, “From a long-term point of view, trading volume is moved by market conditions, rather than tax rates for stock transactions.”
The tax cut is expected to boost arbitrage trade, a trading tactic that earns profit from price differences between markets, by institutional investors.
Song Seung-yeon, an analyst at Korea Investment & Securities, said transactions of large-cap stocks on the KOSPI and KOSDAQ markets are likely to increase if arbitrage trade grows.