Why Sabahans argue about 40% tax revenue

 

Sabah political leaders have long argued that the state deserves a higher share of federal tax revenue derived from the state. (Wikipedia pic)

PETALING JAYA: Finance minister Tengku Zafrul Aziz recently shocked Sabah political leaders about a new revenue-sharing formula between Sabah and the federal government.

Sabahans were taken aback to learn an old 40% formula no longer applied.

Revenue-sharing has been a bone of contention with Sabah political leaders over the years, with the 40% figure being held as a touchstone of federal-state relations.

FMT takes a closer look into the Sabah tax revenue controversy.

Why do they talk of a 40% share?

Sabah’s claim flows from the Federal Constitution, which states that the federal government must allocate to Sabah and Sarawak special grants each financial year.

For Sabah, the amount of the grant is stated as being equal to two-fifths, or 40%, of the amount by which the tax revenue collected by the federal government from Sabah exceeds the net revenue derived in 1963, the year Malaysia was formed.

If RM50 million in tax revenue was collected from the state in 1963, and RM200 million was collected last year, the 40% share would be calculated based on the difference, that is 40% of RM150 million.

Sabah Law Society president Roger Chin said that the constitutional provisions were put in place in 1963 so that the two states could meet their needs above and beyond what other states receive, to assist in faster development.

However, Chin told FMT that the special grants to Sabah and Sarawak are subject to review under Article 112D of the constitution and the 40% formula is not set in stone.

First review of revenue-sharing

The constitution states that there shall be a review of the special grants in 1969 and 1974 and thereafter at such time as the federal or the state government may require, he said.

The first review was done in August 1970, where the federal and Sabah state governments agreed on payment of a fixed amount of federal grants.

These were: RM20 million in 1969; RM21.5 million in 1970; RM23.1 million in 1971; RM24.8 million in 1972 and RM26.7 million in 1973.

Last week, deputy chief minister Jeffrey Kitingan said Sabah’s net revenue in 1969, based on the 40% formula, was about RM22 million and a sum of RM20 million was agreed upon as the annual federal grant to the state, with a 7.5% annual increase.

Kitingan also said that after 48 years, that sum should have been far larger than the RM26.7 million that Sabah now receives annually.

Does the 1970 review still stand?

Chin said that the 1970 order was not meant to change the 40% formula as Article 112D of the federal constitution provides for a second review to be done for the next five-year period beginning 1974.

However, no second review has been carried out.

Luyang assemblyman Phoong Jin Zhe told FMT that the Pakatan Harapan federal government had allocated a bigger amount to Sabah in 2020.

“The minister proposed to increase the rate, doubling it to RM53.4 million for Sabah, with further plans to double the rate again to RM106.8 million within the next five years,” he said, based on the Budget 2020 Speech made by Lim Guan Eng as finance minister.

Phoong said that when the Perikatan Nasional government came into power, the amount dropped back to RM26.7 million for 2021.

What must be done next?

Chin said the 1970 order can only be superseded by a further review which is now long overdue.

He said the constitution makes it very clear that reviews are to be conducted between the federal and Sabah state governments jointly and never unilaterally, and the original 40% formula may still be used as the basis for new figures,”.

On Thursday, the finance minister told the Dewan Rakyat that the federal and Sabah state governments are in the process of revising the revenue sharing formula, which will be announced soon. - FMT