Soon after Prime Minister Dr Mahathir Mohamad proposed the reduction of corporate tax for small and medium sized industries and companies (SMIs/SMCs) from 28% to 20% for the first RM100,000 during the recent tabling of Budget 2003, quite a number of people were praising him for being so kind to the SMIs/SMCs.

Some even said that this was like a direct grant of RM8,000 to the benefitting sectors. Others sing of it as an "indirect incentive" and will make SMIs/SMCs bullish.

But one should not count the chickens before they are hatched. For according to a Star report, "Dividend trap in corporate tax cut", there is more to it.

The dividend trap is that the said proposal also comes with a tax deduction of 20% at company level but the shareholder is taxed at 28% on receiving the dividend. As a result, the shareholders of these SMIs/SMCs upon receiving their dividends will have to pay 8% additional tax on them.

Consequently, the rate of tax on each ringgit of profit earned and distributed by way of dividends may increase. So when Mahathir said the government will lose an estimated RM270 million in revenue, it may not exactly be true. The extra tax payable by the shareholders may more than compensate for this estimated loss of revenue.

So it looks like what is given by the right hand will eventually be taken back by the left and it looks like what is taken back will be even more.

Makes one wonder whether this budget proposal is actually friendly to SMCs/SMIs. The SMI president, who was one of those singing praises soon after the announcement, and accounting bodies should now re-evaluate their goodies now that they have had more time to digest and tell us common folk how good a deal we are actually getting.