FEDERALISM –

FINANCE
Noor Shuhadawati Mohamad Amin
Financial Burden
• Art 82

Source of Income
• Federal
• State

Money management
• Auditor General
• National Finance Council

Sabah & Sarawak

 Distribution of Powers

In a federal system, financial management is importance, dictating the scope of actions for both
federal and state governments in accordance with their respective resource capacities.
The guiding principle lies in the allocation of responsibilities:
• Federation shoulders expenses listed under the Federal list;
• States bear those under the State list;
• For matters listed under the Concurrent list, authority is exercised by whichever entity holds
jurisdiction over the specific power in question.
 Financial Burden
Financing of expenditure relating to matter on Concurrent List
Art 82
Where any law or executive action relating to any of the matters enumerated in the Concurrent List
involves expenditure, such action shall be taken under this Constitution as will ensure that, unless
otherwise agreed, the burden of that expenditure is borne—
(a) by the Federation, if the expenditure results either from federal commitments or from State
commitments undertaken in accordance with federal policy and with the specific approval of the
Federal Government;
(b) by the State or States concerned, if the expenditure results from State commitments undertaken
by the State or States on its or their own authority.
Example: Police Force is under the purview of the Federal Government while Zakat department is
under the purview of each state.
 Financial Burden
However, there are certain situations where the Federal government would assist the State
government in the matter of State.
Art 12 (2) –
The federal or state government can also establish, support, or fund Islamic institutions and provide
instruction in Islam, incurring necessary expenses for this purpose. For example, SMKA was initially
under the purview of the state government. Later, Federal started to take the religious school and
turn it into SMKA.
 Source of Income – Federal Government
Federal Government
the federal government controls the financial revenue either to increase or decrease the
money/income/tax.
In Item 7, List 1 of Schedule 9, the government has power to impose:
• Income tax - Tax is imposed annually on individuals who receive income in respect of profit from a
business/employment, dividends and many others (under Income Tax Act).
• Goods & Services Tax (GST) – 10% taxable on most goods and services.
• Custom duties – fees charged on goods from international borders.
There are situation when Federal also takes income from the subject matter belonging to states. For
example, in purchasing house, the government has power to impose stamp duty.
State Government’s source of income, on the other hand is limited.
Source of Income – State Government
Art 110, Schedule 10
• Forest, logging, mines, toddy shop, court fees etc. (refer to Part I of the 10th Schedule)

Art 109 (1) (a) – FROM FEDERAL

• Compulsory Capitation Grant – based on population in each state

Art 109 (1) (b) - FROM FEDERAL

• State Road Grant – to maintain state roads

Art 109 (6)

• State Reserved Fund – consultation with National Finance Council. Normally given to state for purpose of development. Example:
developing Projek Perumahan Rakyat Termiskin (PPRT)

Art 103 + Art 109 (5)

• Contingencies Fund – for urgent and unforeseen need of expenditure such as COVID-19.

Art 109 (3)

• Specific purposes fund – for specific purpose such as holding national sports SUKMA.

Art 111
• Borrowing - A state is not allowed to raise or borrow money except from the federation or federally approved bank.

Art 97 (2)
• Petroleum revenue received by states shall be paid in that state consolidated fund.
 Source of Income – State Government
Government of Malaysia v Government of the State of Kelantan [1968] 1 MLJ 129
Facts: Kelantan government who won the election promised to build a bridge in the state. For that
purpose, the government entered into a concession with a company that allows the company rights
to mining and forestry activities. In return, the company will provide pre-payment to the
government. Dispute over the prepayment of royalties constituted a borrowing in violation of
Article 111(2) of the Federal Constitution and that the refunding thereof would violate Article 97(2)
of the Federal Constitution since the money did not go the the Kelantan Consolidated Fund.
Court: The agreement could not convey the meaning of a real loan and real borrowing (court cannot
establish the relationship lender and borrower). It was a just a prepayment. Hence, federal
government lost the case.
After that, amendment was made to the definition of the word ‘borrowing’ in the Constitution to
include prepayment of royalties to be lending.
 Source of Income – State Government
Petroleum royalties – 5% royalties to be given to states with oil.
Sabah & Sarawak have been receiving the five per cent oil royalty since 1976 under the Petroleum
Development Act (PDA) 1974. Sabah and Sarawak produce about 60 per cent of the country's total
petroleum output.
A year after PAS took over Terengganu in 1999, the royalties were converted to goodwill payment
(wang ehsan), which was then channelled via a federal development department, while Kelantan
has been demanding royalties for years but has only been given "wang ehsan" since 2010.

To increase 5% - 20% under new leadership Pakatan Harapan in 2018. However, this was not
achieved.
 Management
Art 97 – Consolidated Funds
All revenues and moneys howsoever raised or received by the Federation shall, subject to the
provisions of this Constitution and of federal law, be paid into and form one fund, to be known as
the Federal Consolidated Fund.
For state – Consolidated Fund of that State.
Art 98 – Expenditure charged on Federal Consolidated Fund
The money is used for grants, pensions payment, loss of office, gratuities, debt charges where
Federation is liable and money required to satisfy judgment made against the Federation.
Art 99 - Annual financial statement
Annual financial statement made by the federal government tabled in Dewan Rakyat (Budget
Debate).
 Management
Art 105 -107 – Auditor General
Appointment of auditor general who are important to audit the accounts of the federation and the
states.
The report is discussed by Public Account Committee (PAC) and shall submit his reports to the Yang
di-Pertuan Agong.
Art 108 – National Finance Council
Federal & state can discuss on matters of finance. This is a concept based on cooperative federalism.
Such concept highlights the coordination between federal and state government in terms of
finance.
 Position of Sabah & Sarawak

Part IV & V of 10th Schedule – grant, import duty, excise duty on petroleum products, export duty on
timber and other forest produce.
Art 112B – Borrowing powers of Sabah & Sarawak is not restricted by art 112B so long approved by
the central bank.
Art 112C – Special grants and assignments of revenue to Sabah & Sarawak.