Despite the fact that Malaysia was formed as a federated state with powers in managing religion, land, natural resources and water being provided to state governments, the state governments are practically left with very little fiscal autonomy.

Centralism has crept in under the iron-fist rule by Umno and reached its peak at present where the central government has almost absolute  power in appointing bureaucrats at the federal, state and local levels. The central government collects almost all taxes and decides even local developments.

 

Under the present federal constitution, state governments are not allowed to raise their own funds through taxes other than revenues related to land, mines, water and forests. They cannot even make any loans without the prior approval of the federal government and its agency Bank Negara Malaysia.

In other words, federalism can only be preserved if decentralisation of power to collect taxes and to develop one’s state is entrenched in our federal constitution.

 

Barisan Nasional practises fiscal favouritism. Barisan Nasional-ruled states are given favourable allocations as compared to the Pakatan Rakyat-ruled States. Between 2001 and 2008, Penang contributed to the federal treasury as much as RM25.67 billion in the forms of taxes and customs duties but received only RM794 million in federal grants or 3% of the revenue contributed to the federal government.

 

On the contrary, between 2004 and 2008, Johor instead paid RM20.76 billion in revenues to the federal government and received development allocations as much as RM9.9 billion or 47% of its revenue contributed to the federal treasury. Nonetheless, the Johor state government is in  grave debt of RM1 billion with only RM36 million in reserve funds in the bank as of Dec 31 2008 while its average monthly operation costs are as high as RM57 million.

Johor was forced to sell its water supply assets to PAAB (Pengurusan Aset Air Berhad) at a price of RM4 billion in March 2009 but thereafter, Johor would have to pay an annual lease of RM260 million to get water supply from PAAB in a 30-year concession. In other words, the Johor government’s sovereign right over its water was surrendered to a GLC under the federal government.  

Johor Barisan Nasional government’s own fiscal mismanagement has led to the scene where the state governments remaining few powers left with it to manage its own water resources and supply has been taken away by a GLC under the Ministry of Finance. The same parallel happens in many other Barisan Nasional-ruled states.

 

In the US where federalism prevails, state and local governments are given powers to collect certain taxes including sales tax and to decide on their own development in essential fields such as education, water, land, health and even public safety and security. Federalism is more suitable for a diverse country like Malaysia.

 

In the US, state and local governments collect ‘Sales and Use Tax’ because they need to fund essential service sectors such as education and healthcare as these sectors are the jurisdiction of the state governments.

 

In our situation, the proposed Goods and Service Tax (GST) should be collected by state and local governments and state governments should be permitted to use these funds to prop up alternative education, a supportive and paramedic healthcare system, public transport and so forth.

Nonetheless, GST should not be imposed if it were a burden to the people especially the lower income group and SME. Essential goods especially food should not be taxed, and SME should be given GST exemption in order to give them a better competitive edge against the much more powerful big corporate outlets and hypermarkets.

 

Some say that the only the right time to impose GST is when more than 85% of the workforce are able to pay income tax. At present it is said to be only about 15% and the lower income groups would be worse hit by the GST.

Whether GST should be imposed and how it should be imposed so as to maximise benefits for the people are topics that  need in-depth studies. But transparency and the fair distribution of tax money are far more important than what forms of tax would be imposed.