Although corporate tax remains at 28 percent, Finance Minister Dr Mahathir Mohamad said it is still well below those of other countries.

He said that the rate may appear high, but then there is no tax on dividends.

Mahathir, who is also Malaysia's prime minister for 21 years, cited Taiwan's 30 percent tax on dividends, Japan's 30 percent and Thailand's 10 percent as comparisons.

"If this is taken into account, their tax burden is significantly higher that is, Taiwan 47.5 percent, Japan 59.4 percent and Thailand 37 percent," Mahathir said in his two-hour speech at the Parliament to present the 2003 Budget.

Mahathir also said corporate tax should not be viewed only in terms of its nominal rate but must take into account the provision of tax incentives.

Foreign direct investment

"If these incentives are included, our effective tax rate for the manufacturing sector is only 8 percent," said Mahathir, who took over the finance portfolio after sacking the previous minister, ex-deputy premier Anwar Ibrahim in 1998.

He said where Malaysia is concerned, it is not true that a low corporate tax regime will attract more foreign direct investment (FDI) as the country has been successful in this area even when its corporate tax rates were at 40 percent in the 1980s and 30 percent in the 1990s.

"In addition, countries with higher effective corporate tax rates than Malaysia, such as Thailand, China, South Korea and Taiwan have also succeeded in attracting FDI," Mahathir added.

He said the reduction in corporate tax rate does not necessarily lessen the tax burden of foreign investors as they still have to pay taxes in their country of origin.

"Hence, our tax forgone will be tax gain in their country," Mahathir said.

He added that, in order to stimulate Malaysia's domestic growth, the government is looking at various other incentives.

He stressed that other factors influence foreign investors' decisions to invest such as socio-political stability, the availability of world-class infrastructure facilities, trained and easily trainable manpower, and efficient economic management.

Not election budget

Nevertheless, the premier did present some good news for those in the small- and medium-size industries (SMIs) as he proposed their corporate tax rate for companies with paid-up capital of RM2.5 million and below be reduced from 28 percent to 20 percent on chargeable income up to RM100,000.

"This measure will result in a revenue loss of about RM270 million to the government," said Mahathir who at the end of his speech denied that this budget was designed to make the government look good for the coming election.

Although the general election is not due until late 2004, it is believed that the government will call for it sometime next year.