UPDATE 2-Malaysia weighs windfall tax as prices rise

(Recasts, adds details)

By Soo Ai Peng

KUALA LUMPUR, May 21 (Reuters) - Malaysia may impose a windfall tax on industries least affected by inflation to help curb price pressures, a government minister said on Wednesday, as annual inflation climbed to a 15-month high in April.

"One of the proposals that we have considered is to impose excess profit tax or windfall tax," Domestic Trade Minister Shahrir Samad told reporters. "The concept is to make sure that there is a fair distribution from groups whose incomes are not directly affected because of inflation."

The minister declined to name which industries would be affected under the proposal.

"Whoever feels that they have a windfall, they will be taxed. It's part of the anti-inflation approach that we have taken."

Commodity companies are normally seen as inflation-proof as their income grows as prices go up.

Shahrir said such additional tax income would allow the government to maintain its development agenda without making a big cut to its subsidies for basic items, which is key to curbing runaway prices.

"We want to ensure that government revenue will continue growing and its expenditure could still be channelled to subsidies. Also, we need extra income to fund developments," he added.

Malaysia's annual inflation rose to 3.0 percent in April, the highest level in 15 months, led by higher food prices, official data showed, and the increase was in line with market forecasts.

High food and energy costs are driving up Malaysian consumer prices but price controls on goods such as flour and cooking oil are helping to keep inflation among the region's lowest.

Shahrir said the food index in April rose 5.7 percent. The consumer price index (CPI) rose 2.7 percent in January-April, while the food index was up 4.7 percent during these four months.

But analysts said there was little chance of a rate rise at the central bank's policy meeting on Monday, given that Malaysian inflation still remained the lowest in the region.

Indonesian inflation in April stood at a 19 month-high of 8.96 percent and Thailand's annual headline inflation hit a two-year high of 6.2 percent in the same month.

Relatively subdued price pressures have allowed Malaysia's central bank to keep its key interest rate unchanged for the last two years. At 3.50 percent, the official rate is among the lowest in the region.

Shahrir said the government planned to unveil its blueprint to reform fuel subsidies by the end of this year.

The government has estimated subsidies for petrol and gas will rise to 45 billion ringgit ($13.9 billion) in 2008, putting an unsustainable strain on its budget.

"I would prefer more subsidies for food. As for subsidies for petrol, they must be better managed so that there is less leakage," Shahrir said.

Shahrir said an anti-inflation committee chaired by the prime minister may also announce a reform to a windfall tax imposed on the palm oil sector to deal with complaints that the industry is overtaxed.

Malaysia is the world's top palm oil producer. The government has been subsidising cooking oil makers since last May by collecting a cess payment from big palm oil companies such as state-controlled Sime Darby (SIME.KL) and industry No.2 IOI Corp (IOIB.KL).

(Editing by Faisal Aziz and Jacqueline Wong)