Deputy Prime Minister and Minister of Economy and Finance Choi Sang-mok, right, speaks during a press briefing on tax code revisions at Goverment Complex Sejong, Monday. Yonhap

The government has decided to cancel the proposed capital gains tax on financial investments after years of debates over concerns that the tax could harm the capital market and disadvantage small investors.

Additionally, it will reduce the top rate of inheritance tax from 50 percent to 40 percent as part of a measured effort to reform the taxation system.

The Ministry of Economy and Finance announced these measures, Thursday, as part of the annual tax system revision proposals aimed at lowering the tax burden on businesses, investors and households in line with changes in the economic environment.

"The government is committed to establishing an efficient and rational taxation system through this year's tax reform," Deputy Prime Minister and Minister of Economy and Finance Choi Sang-mok said during a press briefing.

He emphasized that tax reform is essential because, despite being on the path to recovery, the Korean economy continues to face challenges such as declining living standards and structural risks including demographic issues and reduced growth potential.

"In that regard, the government will overhaul old and outdated policies to reflect the changes visible in the economic conditions, while upholding its principle of fiscal soundness," Choi added.

One of the key revision proposals is the scrapping of the financial investment income tax, which was originally set to go into effect in 2023, but has been postponed to 2025.

It focuses on a handful of wealthy investors, who earn a net income of at least 50 million won per year from investments in stocks and exchange-traded funds, or at least 2.5 million won per year from other financial instruments.

However, it drew a backlash from a larger pool of small investors, estimated to be 14 million in number. They argued that wealthy investors — to avoid taxes — will unload their shares and exit the stock market. Such a departure, according to small investors, will have a negative ripple effect on the market and inflict losses on them.

Amid such opposition, President Yoon Suk Yeol has pledged to abolish the financial investment income tax. Several opposition party members, including former Democratic Party of Korea leader Lee Jae-myung, have advocated for an additional delay in implementing these tax changes.

Another significant change will involve reducing the maximum inheritance tax rate from 50 percent to 40 percent.

The maximum rate, which stands as the second highest in the OECD after Japan's 55 percent, has drawn criticism for potentially obstructing the succession of not just large conglomerates (chaebols) but also smaller family-owned businesses, impeding their ability to continue operations after paying the hefty tax.

Over the past 25 years, the inheritance tax policy has faced criticism for failing to accurately account for the wealth accumulation of the middle class over time, resulting in an undue tax burden on them.

In light of these concerns, the exemption for inheritance per child will increase to 500 million won from the current 50 million won.

To enhance the competitiveness of advanced and strategic technologies, the government will also expand tax credits on related R&D activities.

Additionally, tax credits for various technologies will be extended until 2027.

To urge more Korean companies to bring their manufacturing plants back home, the government will extend tax breaks to 2027 as it is currently set to expire in 2024.

The targeted companies will receive a full exemption on both personal income taxes and corporate taxes for the first seven years upon their return and a 50 percent reduction in the following three years.

To enhance investor protection measures, the implementation of a 20 percent tax on all crypto gains will be delayed for an additional two years to 2027. Originally planned for 2023, the measure was first postponed to 2025.

In a bid to encourage marriage and tackle the world's lowest birthrate, 1 million won will be given as a tax credit for newlyweds. The benefit will be offered only once in their lifetime considering that the divorce rate is high in Korea.

Meanwhile, the so-called comprehensive real estate holding tax remained untouched by the government in this year's tax reform, despite growing demands from taxpayers for an overhaul.

It is an additional tax burden imposed on owners of expensive houses and those who possess multiple homes. Whether it serves its goal as a punitive measure against real estate speculation, however, is doubtful as housing prices have surged and the middle class is increasingly subject to more taxation.

The finance minister deemed this year's tax system revisions will result in a 4.4 trillion won decrease in tax income for the next five years, after the government suffered a record tax revenue shortfall in 2023.

Nevertheless, he assured of "positive outcomes from investment- and spending-oriented policies, which in turn, will help improve conditions concerning tax revenues."

The government plans to submit the proposals to the National Assembly for approval before Sept. 2, after drafting guidelines and seeking a separate approval at a Cabinet meeting.