KUALA LUMPUR, March 18 (Reuters) – Malaysia is considering proposals to end its subsidy regime and phase in a new goods and services tax as it begins dismantling a four-decade race-based economic system that has deterred foreign investment.

The economic regime adopted after race riots in 1969 has given a wide array of economic benefits to the 55 percent Malay population, but investors complain it has led to a patronage-ridden economy that has resulted in foreign investment increasingly moving to Indonesia and Thailand.

The reform proposals have been seen by the cabinet and will be reviewed again before Prime Minister Najib Razak presents them at the ''Invest Malaysia'' conference this month in a bid to woo foreign investors, a government source who has seen the plans told Reuters.

''The proposal cites political implications for some of the measures and calls for the government to make some tough decisions,'' said the source, who could not be named because of the controversial nature of many of the policies.

The government last weekend abandoned politically sensitive plans to introduce a goods and services tax just weeks after it halted implementation of petrol price hikes aimed at cutting its subsidy bill and electricity price rises. It cited a need to ''engage with the public'' as reason for the delay.

The new reform plans, drawn up by an influential government advisory body and which will be open to public discussion, say the government will end price controls and subsidies, mainly for fuel, food and power ''with minimal exceptions.''

''The savings should then be allocated to widen the social safety net for the bottom 40 percent of households,'' said the source.

Malaysian power tariffs are half those of neighboring Singapore, according to a recent report by investment bank Maybank on electricity company Tenaga Nasional.

A series of policy flip-flops in recent years have dogged Malaysia's reform efforts and the country has seen net foreign direct investment outflows to the tune of 26.1 billion ringgit ($7.88 billion) over the past two years.

Malaysia attracted 31 percent of the total foreign direct investment that went to Malaysia, Indonesia and Thailand in 2008 versus half of that total in the 1990-2000 period, according to UN data.

The stock market has languished and foreign ownership dropped to 20.4 percent of market capitalization at the end of 2009 from 26.2 percent at the end of 2007, according to official data.

Malaysia will seek to position itself in high growth industries under the new reform proposals, aiming to achieve per capita gross national income of $17,000 by 2020, which would make it a developed nation by World Bank standards.

Countries such as South Korea and Singapore have already made that leap.