MALAYSIA

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

2014-2015 Revenue and Expenditure by

Government Level
MALAYSIA REVENUES
Federal Government
State Government
Statutory Body
Local Government
Total Revenue (in RM Million)

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

MALAYSIA OP. EXPENDITURES

Federal Government
State Government
Statutory Body
Local Government
Total Operating Expenditure

MALAYSIA DEVT. EXPENDITURES

General Government
Federal Government

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

Total Public Sector Net Development

Expenditure

Source: Ministry of Finance Malaysia

(http://www.treasury.gov.my/index.php/en/economy/economic-data.html)

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)

4 PART V: ADDITIONAL SOURCES OF REVENUE ASSIGNED TO STATES OF SABAH AND SARAWAK1.

Import duty and excise duty on petroleum products.
2. Export duty on timber and other forest produce.
3. So long as the royalty levied by the State on any mineral chargeable with export duty other than tin (but including
mineral oils) does not amount to 10 per cent ad valorem calculated as for export duty, export duty on that mineral or
such part of the export duty as makes the total of royalty and duty on exported mineral up to 10 percent ad valorem
so calculated.
4. In the case of Sabah, so long as medicine and health remains an item in the Concurrent List and expenses in
respect of that item are borne by the State, 30 per cent of all customs revenue other than that in respect of the duties
mentioned in sections 1, 2 and 3.
5. For any year before 1974 and, if at the beginning of 1974 the Legislature of the State has power to make laws
with respect to the carriage of passengers and goods by land or with respect to mechanically propelled road vehicles
or licences connected with those vehicles, then during the continuance of that power, fees from such licences.
6. For any year before 1974, and if at the beginning of 1974 the Legislature of the State has power to make laws
with respect to the registration of mechanically propelled vehicles, then during the continuance of that power, fees
from the registration of such vehicles.
7. State sales taxes.
8. Fees and dues from ports and harbours other than federal ports and harbours.
9. Receipts in respect of water supplies and services, including water rates.
10. Revenue from licences connected with water supplies and services. (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

10% of the revenues

collected from export
duties on tin, iron and
minerals ores
(Source: Malaysian
Constitution and Acts)

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.

2. General Purpose grants

A. Capitation grant10
The grant is established under the Article 109(1)a of the Federal Constitution which provides that
The Federation shall make to each State in respect of each financial year(a) a grant, to be known as a capitation grant, which shall be calculated in accordance
with the provisions of Part I of the Tenth Schedule.
PART 1: CAPITATION GRANT
1. (1) The capitation grant payable to each State in respect of a
financial year shall be at the following rates:
(a) for the first 100,000 persons at the rate of RM72.00 per person;
(b) for the next 500,000 persons at the rate of RM10.20 per person;
(c) for the next 500,000 persons at the rate of RM10.80 per person;
(d) for the remainder at the rate of RM11.40 per person,
and shall be based on the annual population projections of the State
as determined by the Federal Government and calculated as of the
last population census: Provided that if the last census was taken
one year before the beginning of the financial year, the grant for
that particular year shall be based on the population as determined
by that population census. with an objective of assisting state
government in meeting financial requirements. The grants are not
subject to any spending restrictions or tax effort requirements. The
amount given is based on the population determined by the
population census if the last census was taken one year before the
beginning the financial year or on the annual population projection
calculated as of the population census. One of the rationales behind
the introduction of this new rate is to achieve fairer distribution for
the poorer states assuming that the less populous states are
relatively poor states.
B. Revenue Growth Grant
The grant is established under the Revenue Growth Grant Act 1977 & Revenue Growth
Grant Act (Amended) 1980. The grant was based on the premise that state governments should
also benefit from the growth of federal government revenue. The grants are payable to the state
governments if the total revenue of the Federal government after deducting tin duties and taxes
raised under the Road Traffic Ordinance 1958 increases by more than 10% in a particular year
over the previous year. The grants are however subject to a maximum of RM150 million
(originally 100 million).11
10

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

Revenue Growth Grant

the State as determined by

the Federal Government
and calculated as of the
last population census.
(Source: Malaysian
Constitution)
2. Whenever there is a
growth in the revenue of
the Federation in any
financial year as compared
to the preceding financial
year the Minister shall for
the following financial
year allocate for the
purposes of making grants
under sections 4 and 4A an
amount not exceeding one
hundred and fifty million
ringgit to be apportioned
as follows
(a) a portion of the
amount not
exceeding fifty
million ringgit for
the purposes of
section 4;
(b) the remainder
portion not
exceeding one
hundred million
ringgit for the
purposes of section
4A:
Provided that the limit of
one hundred and fifty
million ringgit, fifty
million ringgit in
paragraph (a) and one
hundred million ringgit in
paragraph (b) may be
reviewed and varied by the
Minister.

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

7. The grants made to the

States under sections 4 and
4A shall be charged on the
Federal Consolidated
Fund.
(Source: Malaysian
Constitution)
PART IV SPECIAL

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

State Reserve Fund grants

Contingencies fund grant

has power to make laws

with respect to the carriage
of passengers and goods
by land or to mechanically
propelled road vehicles,
then during the
continuance of that power,
a grant equal to the cost to
the State in the year of the
State road transport
department.
(Source: Malaysian
Constitution)
The Federation shall pay
into a fund, to be known as
the State Reserve Fund(b) in respect of every
financial year such sum as
the Federal Government
may, after
consultation with the
National Finance Council,
determine to be necessary;
and the Federation may
from time to time, after
consultation with the
National Finance Council,
make grants out of the
State Reserve Fund to any
State for purposes of
development or generally
to supplement its
revenues.
(1) Parliament may by law
provide for the creation of
a Contingencies Fund and
for authorising the
Minister charged with
responsibility for finance,
if satisfied that there has
arisen an urgent and
unforeseen need for
expenditure for which no
other provision exists, to
make advances from the
Contingencies Fund to

meet that need.

(2) Where any advance is
made in accordance with
Clause (1), a
supplementary estimate
shall be presented and a
Supply Bill introduced as
soon as possible for the
purpose of replacing the
amount so advanced.
(Source: Malaysian
Constitution)
State Advance Fund grant
3. Specific Purpose grants
A. State Road grant
The grant is established under the Article 109(1)(b) of the Tenth Schedule, Part two of the
Federal Constitution. The objective of the grant is to assist State governments in maintaining
state roads, municipal roads, roads to low cost housing areas and back lanes.16
B. Economic Development grants
The objective of the grants is to allocate more funds to less developed states to reduce
economic and social disparities as well as to promote state development in line with the National
Economic Plan. The share of each state is determined by the Federal government with the
cooperation of states EPU based on socio-economic indicators.17
C. Service Charge grant
It is established under the Article 80(5) of the Federal Constitution.18
D. Cost Reimbursement grant
The grant is in support of specific programs in areas of joint responsibility between the
federal and state governments. The reimbursement is 100% of the development expenditure for
federally approved agriculture, veterinary, works and drainage projects. Meanwhile, for the
operating expenditure of the state drainage, veterinary and welfare department the
reimbursement rate is only 50% of the expenditure.19
E. Grant to religious schools and institutions
Since 1956 a special grant was created under the purview of the Ministry of Education to
assist any registered religious school (with student equal or more than 35) not maintained by the
Ministry of Education under the Education Act of 1961 or by the State government.20
16 Ibid.
17 Ibid.
18 Ibid.
19 Ibid.
20 Ibid.

Types of Specific Purpose

grants

Formula

State Road grant

PART II: STATE ROAD

GRANT 2. The State road
grant payable to each of the
States of Malaya in respect of
a financial year shall be
calculated by multiplying
(a) the average cost to a State
of maintaining a mile of State
road at the minimum standard
determined for State roads in
those States by the Federal
Government after
consultation with the
National Finance Council; by
(b) so much of the mileage of
State roads in the State as
qualifies for grant.
3. For the purpose of section
2
(a) the mileage of State roads
in a State shall be taken to be
that mileage as on the thirtyfirst day of December of the
preceding financial year, and
the 187 average cost
mentioned in paragraph (a) of
that section shall be taken to
be the average cost in that
State calculated in the
preceding financial year; and
(b) the maintenance of State
roads means the preservation,
upkeep and restoration of
State roads, roadside
furniture, bridges, viaducts or
culverts forming part thereof
or connected therewith as
nearly as possible in their

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

Service Charge grant

Cost Reimbursement grant

Grant to religious schools and

institutions
21 Ibid.

shall be the minimum

standard determined for State
roads in the State; and (b) any
length of road maintained by
a local authority at the
expense of the State shall be
treated as maintained by the
Public Works Department of
the State.
(Source: Malaysian
Constitution)
The share of each state is
determined by the Federal
government with the
cooperation of states EPU
based on socio-economic
indicators.
(5) Subject to any provisions
of federal or State law,
arrangements may be made
between the Federation and a
State for the performance of
any functions by the
authorities of the one on
behalf of the authorities of
the other and such
arrangements may provide
for the making of payments
in respect of any costs
incurred under the
arrangements.
The reimbursement is 100%
of the development
expenditure for federally
approved agriculture,
veterinary, works and
drainage projects.
Meanwhile, for the operating
expenditure of the state
drainage, veterinary and
welfare department the
reimbursement rate is only
50% of the expenditure.21