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FORM OF GOVERNMENT
Malaysias form of government is FEDERAL CONSTITUTIONAL MONARCHY. It
is nominally headed by paramount ruler (commonly referred to as the king) and a bicameral
Parliament consisting of a nonelected upper house and an elected lower house. All Peninsular
Malaysian states have hereditary rulers (commonly referred to as sultans) except Melaka
(Malacca) and Pulau Pinang (Penang). These two states along with Sabah and Sarawak in East
Malaysia have governors appointed by government.
The powers of state governments are limited by federal constitution1. Under the terms of
the federation, Sabah and Sarawak retain certain constitutional prerogatives (e.g., right to
maintain their own immigration controls).2
Rat
io
Rat
io
177,32
7
12,553
17,799
7,510
215,1
88
79%
8%
9%
4%
100
%
82%
6%
8%
3%
100
%
193,39
5
11,646
31,416
6,936
243,3
93
187,32
8
11,972
31,534
7,768
238,6
02
79%
5%
13%
3%
100
%
79%
5%
13%
3%
100
%
48,88
4
56,07
5
100
%
65%
100
%
67%
2014
2015
162,29
1
17,223
17,962
7,465
204,9
41
1 The latest federal constitution of Malaysia was drafted 21 February 1957 and took effect on 27
August 1957. It has been amended many times and the latest amendment was in 2010. (Available
at: https://www.cia.gov/library/publications/the-world-factbook/fields/2128.html#my, last
accessed 28 September 2016)
2 See, https://www.cia.gov/library/publications/the-world-factbook/fields/2128.html#my
31,885
37,474
State Government
7,693
10,167
16%
18%
Statutory Body
7,373
6,390
15%
11%
Local Government
1,933
2,044
4%
4%
PABK/NFPE's
105,6
83
111,3
80
154,5
67
167,4
55
Source: http://www.treasury.gov.my/pdf/ekonomi/er/1516/chapter4.pdf
TYPES OF REVENUE TRANSFERS
Article 110 of the constitution delineates the sources of revenue available to the state
governments. Part III3 of the tenth schedule of the Malaysian constitution enumerates in detail
3 PART III: SOURCES OF REVENUE ASSIGNED TO STATES1. Revenue from toddy shops.
2. Revenue from lands, mines and forests.
3. Revenue from licences other than those connected with water supplies and services, mechanically
propelled vehicles, electrical installations and registration of businesses.
4. Entertainments duty.
5. Fees in courts other than federal courts.
6. Fees and receipts in respect of specific services rendered by departments of the State Governments.
7. Revenue of town boards, town councils, rural boards, local councils and similar local authorities other
than
(a) municipalities established under any Municipal Ordinance;
these taxes, fees and other sources of revenue. Part V4 of the tenth schedule lists those additional
revenue-sources assigned to Sabah and Sarawak.5
Article 109 enshrines two sets of federal to state grants - the Capitation Grant and the
State Road Grant - and also makes provision for the possibility of other grants being introduced.
This provision has allowed for, for example, the Revenue Growth Grant and grants to local
governments. The constitution thus explicitly recognized that there was a fiscal gap between
the expenditure responsibilities and the taxing powers of the states. The Capitation Grant as well
reflects recognition of a need for some equalization of revenues across states.6
There are essentially three forms of revenue transfers in Malaysia:
1. Tax Sharing Grants
2. General Purpose Grants
3. Specific Purpose Grants.
(b) those town boards, town councils, rural boards, local councils and similar local authorities
which have power under written law to retain their revenues and control the spending thereof.
8. Receipts in respect of raw water.
9. Rents on State property.
10. Interest on State balances.
11. Receipts from land sales and sales of State property.
12. Fines and forfeitures in courts other than federal courts.
13. Zakat, Fitrah and Baitulmal and similar Islamic religious revenue.
14.Treasure trove. (Available at http://unmis.unmissions.org/Portals/UNMIS/Constitution-making
%20Symposium/Federal%20Constitution%20of%20Malaysia.pdf, last accessed 28 September 2016)
5 http://econ.queensu.ca/pub/jdi/tdri-mier/publications/download/fed_stat.pdf
6 Ibid.
1. Tax sharing grants. These grants are established under the Article 110(3)7 of the Federal
Constitution. The Malaysian Constitution provides that 10% of the revenues collected by the
Federal government from export duties on tin, iron8 and minerals ores9 must be allocated to
the producing states.
Table 1: Tax Sharing Grants
Formula
Tax Sharing Grants
Ratio Local to
National
Expenditures
7 Assignment of taxes and fees to the States110 (3) Each State shall receive, on such terms and conditions as may
be provided by or under federal law, ten percent [10%] or such greater amount as may be so provided of the export
duty on tin produced in the State.
8 Assignment to States (except Sabah and Sarawak) of whole or part of export
duty on iron ore is provided in Sec. 2 (1) of Act 395 known as Export Duty on
Iron Ore of 1962. However, this Act applies only to the States of Peninsular
Malaysia.2. (1) In the case of iron ore produced in any State and exported after
the end of the month of September, nineteen hundred and sixty-two (hereinafter
referred to as "the relevant date") there shall be assigned to that State the export
duty levied on the ore or so much thereof as does not exceed 10 per cent ad
valorem on the value of the ore (as ascertained for the purposes of export
duty). (2) In the case of iron ore produced in any State and exported before the
relevant date the Minister may assign to the State the whole, or such proportion
as he considers equitable, of the export duty levied on the ore. (Available at
http://www.commonlii.org/my/legis/consol_act/aordoioa19621989581/ last
accessed, 28 September 2016)
9 Assignment to States (except Sabah and Sarawak) of export duty on mineral ores is provided in Sec. 2 of Act 396
known as Mineral Ores Act of 1964. However, this Act applies only to the States of Peninsular Malaysia.
2. (1) There shall be paid to the State Governments specified in the first column
in the Schedule a portion of the export duty on the mineral ores (other than iron
ore and tin) specified in the second column in the Schedule, produced in those
States; and the portion of export duty so payable shall be as specified in the third
column in the said Schedule.
(2) No royalty or similar charges (whether under a lease or other instrument or
under any State enactment, or whether the lease or instrument was made or the
enactment passed before or after the 6 Laws of Malaysia ACT 396 making of the
payment under subsection (1)) shall as from the date of the making of the
payment under that subsection be levied by the State Governments in respect of
such mineral ores (other than iron ore and tin), except with the written
agreement of the Minister of Finance.
11 Ahmad Zafarullah Abdul Jalil and Noor Al-Huda Abdul Karim, Understanding Malaysian
State Governments Fiscal Behavior: The Role of Intergovernmental Transfers, Universiti Utara
Malaysia, 2009, p. 5.
C. Special grants
Under the article 112c(1)(a) of the Federal Constitution, special grants are allocated to the
states of Sabah and Sarawak. The objective of these grants is to equalize the standard of services
of the two states to that of the other states in Peninsular Malaysia. Special grants are also
allocated to Selangor which amount to RM 18 305 637.66 millions in lieu of revenues losses due
to the acquisition of Kuala Lumpur (this is based on the revenue collected in 1974) and to Kedah
with an amount of RM10,000 per annum according to 1869 agreement for the lands handed over
to Penang.12
D. State Reserve Fund grants
The grants are established under the Article 109(6) of the Federal Constitution. The
grants are sourced from the State Reserve Fund on an ad hoc basis. The main purpose of the fund
when it was established in 1958 was to supplement the general revenue of state government
facing current account deficits.13
E. Contingencies fund grant
Established under Article 103 of the Federal Constitution, the grant was intended to
provide advances in order to meet urgent and unforeseen operating expenditures for which no
other provisions exist, pending Parliament approval on the required allocation.14
F. State Advance Fund grant
The grants were created to provide cash advance to state governments facing cash flow
problems. The fund was established in 1981. It renders immediate assistance to state
governments, particularly those with limited financial resources in the form of cash advances.15
Table 2: General Purpose Grants
Types of General Purpose grants
Formula
Capitation Grant
(a) first 100,000
persons =
RM72.00/person
(b) next 500,000
persons =
RM10.20/person;
(c) next 500,000
persons =
RM10.80/person;
(d) for the remainder =
RM11.40/person
Based on the annual
population projections of
12 Ibid.
13 Ibid.
14 Ibid.
15 Ibid., p. 6.
Ratio
Apportionment amongst
States equally and on
population basis
4. The sum of money
allocated under paragraph
2(a) shall be apportioned
as grants amongst the
States as follows
(a) one half of the sum
shall be apportioned
equally amongst the
thirteen States; and
(b) the remaining half
shall be apportioned
proportionately
amongst the States, on
the basis of the
population of each
State as determined at
the last census taken
before the preceding
financial year, at two
shares per head for the
first five hundred
thousand, one share
per head for the next
five hundred thousand
and a half share per
head for the
remainder of each
State's population.
Apportionment amongst
States whose per capita
gross domestic product is
below national average
4A. The sum of
money allocated
under paragraph
2(b) shall be
apportioned as
grants amongst
States whose per
capita gross
domestic product is
below the national
average of the per
capita gross
domestic product.
The per capita
gross domestic
product of the
Federation and all
the States of the
Federation shall be
determined by the
Federation. The
grant to be given to
each eligible State
shall be in
proportion to the
percentage which
the difference
between the
national average
and the eligible
State's per capita
gross domestic
product bears to
the sum of all the
differences
between the
national average
and each eligible
State's per capita
gross domestic
product. Allocation
after audit
5. The sums specified in
paragraphs 2(a) and (b) for
allocation under a
financial year shall be
allocated only after the
accounts of all revenue
received by the Federation
for the preceding financial
year have been closed and
audited.
Purpose of grants
6. The grants made to a
State under section 4 shall
be utilized to generally
supplement its revenue
and the grant made to a
State under section 4A
shall be utilized for any or
all of the following
specific development
purposes-(a) water supply;
(b) public housing;
(c) industrial estate
development;
(d) minor works;
and
(e) such other
development
projects as may be
determined from
time to time by the
National Finance
Council established
under Article 108
of the Federal
Constitution.
Grants charged on
Federal
Consolidated Fund
Special Grants
GRANTS TO STATES OF
SABAH AND SARAWAK
1. (1) Yearly special grant
to Sarawak =
RM5,800,000 and must be
reviewed under Article
112D of the Malaysian
Constitution.
2. (1) Yearly special grant
to Sabah, 2/5 of the
amount by which the net
revenue derived by the
Federation from Sabah
exceeds the net revenue
which would have been so
derived in the year 1963 if
189 (a) the Malaysian
Act had been in operation
in that year as in the year
1964; and (b) the net
revenue for the year 1963
were calculated without
regard to any alteration of
any tax or fee made on or
after Malaysia Day, (net
revenue meaning for this
purpose the revenue which
accrues to the Federation,
less the amount received
by the State in respect of
assignments of the
revenue).
(2) In the case of Sabah,
for any year before 1968
in which the State road
grant is less than
RM5,179,500, a
supplement to that grant of
an amount equal to the
deficiency. 3. In either
case, for any year before
1974 and, if at the
beginning of 1974 the
Legislature of the State
Formula
Ratio
original condition as
constructed or as
subsequently improved.
4. A length of State road if it
is actually maintained by the
Public Works Department of
the State at or above the
minimum standard mentioned
in section 2(a) and a length of
any road within the limit of a
local authority if such road is
certified by the Public Works
Department of the State as
coming within the qualifying
standard and maintained at or
above the minimum standard
as mentioned in section 2(a)
qualify for grant.
5. In this Part of this
Schedule, State road means
any public road other than a
federal road, and any other
road other than a federal road
to which the public has
access.
6. (1) The State road grant
payable to Sabah or Sarawak
shall, in each of the years
1964 and 1965, be payable at
the rate of RM4,500 a mile in
respect of a mileage in Sabah
of 1,151 miles and in
Sarawak of such amount as
may be agreed between the
Federal and State
Governments.
(2) Thereafter sections 2 to 5
shall apply to the State road
grant so payable with the
following modifications: (a)
the minimum standard
mentioned in section 2(a)
Economic Development
grants