(Recasts with revised windfall levy rate, adds details on budget allocation) KUALA LUMPUR, Oct 29 (Reuters) - Malaysia has agreed to raise the threshold for its palm oil windfall profit levy effective next year and will set the tax rate at 3% nationwide, the finance minister said on Friday. The threshold price for companies in Peninsular Malaysia will be increased to 3,000 ringgit ($725) from 2,500 ringgit, minister Tengku Zafrul Abdul Aziz said in his budget speech to parliament. The threshold for companies in Sabah and Sarawak, the largest palm oil producing states, will be increased to 3,500 ringgit from 3,000 ringgit, he said. Planters in the world’s second largest palm oil producer had for years appealed to the government to reassess the windfall profit tax structure amid skyrocketing prices, as a labour shortage and output slump inflate production costs. Malaysia’s output of the vegetable is expected to fall to multi-year lows in 2021 after border restrictions designed to curb the coronavirus outbreak halted the entry of workers from countries like Indonesia, India and Bangladesh. The government said it plans to relax restrictions on the entry of migrant workers in the second half of 2022 in order to ease the labour crunch and boost output. The sector is expected to rebound next year in anticipation of the improved production of palm fruit bunches and a better oil extraction rate, according to a government 2022 economic outlook report released ahead of the budget announcement. “The continuation of the national B20 biodiesel programme for the transportation segment, along with higher demand of crude palm oil from India and China, are expected to further support the production of crude palm oil,” the report said. The government has also allocated 35 million ringgit in the 2022 budget to encourage palm oil replanting in smallholder farms, and 20 million ringgit to counter global anti-palm oil campaigns, Tengku Zafrul said. Palm oil is used to make everything from ramen to chocolates and lipstick, but critics have blamed its cultivation for abusive labour conditions and excessive deforestation in wildlife-rich rainforests. ($1 = 4.1390 ringgit) Reporting by Mei Mei Chu; Editing by James Pearson and Emelia Sithole-Matarise