KUALA LUMPUR – Putrajaya should embrace fiscal decentralisation where states would take charge of their development funds, following Penang’s request to review the distribution system seeking a 20% return of the taxes collected from the state.
Senior tax lawyer S. Saravana Kumar of Rosli Dahlan Saravana Partnership (RDS) and Tricia Yeoh of the Institute of Democracy and Economic Affairs (Ideas) say that there are no provisions in the Federal Constitution that grant rights to states to seek tax redistribution from Putrajaya.
He said if the federal government intends to redistribute income to the states, it might be able to do so as a matter of policy or political concession.
He suggested that Putrajaya could start fiscal decentralisation by allocating a portion of taxes collected from – real property gains, capital gains, and sales and services – to the states.
“India has a working (fiscal decentralisation) model for its goods and services tax (GST), where the GST Council serves as a joint forum for the central and state governments to discuss and decide on matters related to GST in the country,” he told Scoop.
In addition, Yeoh told Scoop that it might be a good idea for Putrajaya to take into consideration a recommendation made by academician Lee Hwok Aun to restore GST – perhaps under a new name – and devise a distribution mechanism where the federal government takes half and the state governments involved takes place takes the other half of the taxes collected.
She also said that Putrajaya could agree to return half of all sales tax collected to the states under a new law.
“For this specific case, if the federal government wants to ring-fence whatever tax proceeds are given to states, it might be able to do so under a new law.
“For example, if the federal government agrees to transfer half of sales tax to the state government, this would require a new act, and this act might be able to specify how states are to use these funds for development purposes, or that a certain fixed percentage of these funds must be used for development purposes.”
Yeoh also said that ring-fencing funds when federal-state transfers are made may make them more like the specific grants already allocated in the Federal Constitution, such as the road and capitation grants. This would allow the states to make decisions on the expenditure which is more acceptable to them.
Saravana and Yeoh were commenting on the Penang government’s quest to demand the federal government to return 20% of tax revenues collected from the state so it could get an additional RM1 billion to be used for various programmes and projects to boost development.
However, Penang is facing setbacks when the Finance Ministry (MoF) said last month that Putrajaya could not implement the scheme due to fiscal constraints.
Avoiding leakages, wasteful spending on redistributed taxes
Yeoh said there are typically no controls put in place once the revenues are received by the states, which means that it is the responsibility of the state governments to decide how to reallocate grants given by Putrajaya under the 10th Schedule of the Federal Constitution.
The think tank’s chief executive officer said the state governments have their own mechanisms for deciding how to spend their annual budget.
Therefore, she said states need to practise budget transparency, as she cited the Malaysia Open Budget Index (MyOBI) 2024 where Selangor and Terengganu tied for first place for public availability of state budgets.
She also proposed improving public financial management rules for federal, state and local governments, with Putrajaya leading the way by introducing the Public Finance and Fiscal Responsibility Act.
“We could aim to introduce the same type of enactment at the state level, to improve fiscal management for all states.”
Meanwhile, senior lawyer Cindy Goh Joo Seong of Cheang & Ariff said if any legislation is to be enacted on tax redistribution by Putrajaya to the states, there should be checks and balances provisions that would mandate details of usage of the funds to be set out.
She highlights that this is especially necessary for welfare or healthcare programmes, or infrastructure developments.
“However I can foresee there will also be practical difficulties on the enforcement side as to how the federal and the state governments can work together to implement such projects. So, details on how the money is to be spent must be spelt out clearly to avoid any dispute.”
Putrajaya getting its house in order
Saravana suggested that if Putrajaya wants to ensure that there are no leakages and that states are properly spending the tax money redistributed to them, it must get its house in order, citing the recent Auditor-General’s (A-G) Report which has highlighted numerous leakages and poor fiscal governance.
He suggested that if taxes are to be redistributed to the states, it is “equally important” for the funds to be audited by the A-G.
“It is not that we don’t have a mechanism to curb leakages but the question is whether the government has the political willpower to make those who are responsible for the leakages to face the law swiftly and be subjected to severe sanctions.
“Past and recent experience despite the successive changes in governments doesn’t seem to indicate that our politicians have such a willpower.” – August 5, 2024