Updated date:

Breach on the Rights of State Sales Taxes of Sarawak

I am an independent researcher on Declassified Documents and Constitutional Rights of the Borneo States of Sabah and Sarawak

Article 95B and the Tenth Schedule, Part V (Item No.7) provided that State Sales Tax is Sarawak rights.

Article 95B and the Tenth Schedule, Part V (Item No.7) provided that State Sales Tax is Sarawak rights.

Financial Rights

Financial rights are one of the much-debated topics between the British, Federation of Malaya, Singapore, Brunei, Sarawak, and North Borneo (Sabah) during the formation of Malaysia. Take, for example, the major issue in the negotiations between Brunei and Malaya aside from Brunei’s revenues (especially from oil) was the attempt of the imposition of the new federal government’s right to Brunei taxation. Notwithstanding Bruneian protests, the Tunku issued an ultimatum containing Kuala Lumpur’s final offer which ultimately causes his highness Sultan of Brunei to withdraw from the negotiations for the inclusion of Brunei into the new Federation of Malaysia. Such outcome gives us a picture of how serious the issue was regarding the rights on taxation, as the Sultan of Brunei was ‘not very keen on integration at the present time because of his fear that Malaya would use Brunei as a milch cow’.

Sabah and Sarawak's position is no less different regarding the financial rights of the Borneo territories. The Lansdowne Committee Report disclosed that in early December 1962 a deadlock also seemed to have been reached on financial issues. The representatives of North Borneo demanded that the State ‘should retain control of its own finance, development, and tariff, and should have the rights to work up its own taxation and to raise loans on its own credit.’ Sarawak however, had accepted that taxes and tariffs must be Federal matters but had secured Malayan acceptance of a formula that should enable the State to meet its current expenditures and provide for steady growth in these.

Despite strong opposition from the Borneo bloc, Mr. Tan Siew Sin, representative of the Malayan on the financial sub-committee seems to have been convinced that the British would compel the territories to accept the agreement over the financial rights based on the Malayan counter-proposal and so saw no reason to compromise. With the help of a British promise of £1,500,000 a year for five years for development in the territories, which had been held back earlier by the British to be used in case it should be needed to resolve just such a deadlock, an agreement was reached on the basis of Malayan counter-proposals, which assigned additional items of revenue to the territories; these included the assignment to Sabah and Sarawak on the rights over the State Sales Taxes. Only then, the financial rights were for Federal Government. Such limited taxing powers of the Federal Government over the Borneo Territories were actually being accepted by the Malayan Government on the British Government’s advice (175 CO 1030/1509, no 20, 15 May 1963).

No Taxation Unless Authorized By Law

Today, let us go into more specific on the rights of Sarawak on the Sales Taxes as agreed from the IGC. Based on the Malaysia Constitution, both the Federal Constitution and Sarawak State Constitution made it clear that there shall be no taxation unless authorized by law. The Federal Constitution under Article 96, expressed that, “No tax or rate shall be levied by or for the purposes of the Federation except by or under the authority of federal law.” This means, the Federal Government was only authorized to collect taxes under the Federal jurisdiction only, and therefore, has no authorization to collect State Sales Taxes in Sarawak which fall under State List by virtue of the Article 95B and the Tenth Schedule, Part V (Item No.7) of the Federal Constitution itself. The arrangement and condition of the rights over State Sales Taxes by the Sarawak Government can be found in details in Annex A of the IGC Report, Item No.7 (i) and (ii) which outline that Finance, etc., is a Federal subject except for State Sales Taxes which is subject to the arrangements set out in detail in paragraph 24 of the Report. Subject to these provisions, the executive authority in respect of the collection in Sarawak of sales tax in Sarawak shall be delegated to the Sarawak Government. While under Article 28 of the Sarawak State Constitution also said “No tax or rate shall be levied by or for the purposes of the State except by or under the authority of law.” Under the State law, the Sarawak Government fully aware of their rights over State Sales Taxes has created the State Sales Tax Ordinance, 1998 which has come into force on the 1st day of September 1998.

Sales Taxes 1972 And GST Is Illegal In Sarawak

We don’t need to go far to know that the Sales Tax Act 1972 (Act 64) is illegal to be imposed in Sarawak. where “Part I, 1(2) This Act shall apply throughout Malaysia.” is clearly in breach of the Federal Constitution itself as Sarawak was entitled to State Sales Taxes which fall under State List by virtue of the Article 95B and the Tenth Schedule, Part V (Item No.7) of the Federal Constitution itself. State Sales Taxes, therefore, remain under Sarawak jurisdiction. So, why did the Federal Government, which fully aware of the rights of Sarawak to collect State Sales Taxes has the audacity to impose the Sales Tax Act 1972, in breach of the Malaysia Constitution itself? This is no coincidence, as the rights over the State Sales Taxes were being counter-proposal by the Malayan Government themselves in December 1962 during the IGC.

The Goods and Services Tax (GST) is only another form of Sales Taxes, differing only in the manner in which it was imposed and being uniformly imposed throughout the Federation. Sarawak which already has our own Sales Taxes, and then being imposed by another type of Sales Taxes (GST) was akin to collecting tax twice on the same products and services. This is a robbery of Sarawak revenue. Besides, Article 76 (4), which empowers the Federal Parliament to legislate on certain State matters for the purpose of ensuring uniformity of law and policy, should not apply to the Borneo States (Paragraph 21(5) of the IGC Report). Hence, GST which was uniformly imposed throughout the Federation has caused economic discrimination to the Borneo States, due to our own peculiar economic conditions which were not being considered in the imposition of GST. In addition, the GST which is another form of Sales Taxes is breached the rights of Sarawak to collect State Sales Taxes by virtue of Article 95B and the Tenth Schedule, Part V (Item No.7) of the Federal Constitution. The same situation with Sales Taxes 1972.

However, I believe, the Sarawak Government realized the discriminatory and illegal nature of the GST from the day it was being debated in the parliament. Perhaps, realizing the illegal nature of The Goods and Services Tax Act (GST Act) 2014 to be imposed on Sarawak which was then being hotly debated in the parliament, the Sarawak Government has made the constitutional move by creating The State Sales Tax (Amendment) Regulations, 2015 to remind the Federal Government of the Sarawak rights over the State Sales Tax. Unfortunately, GST remains to come into force on 1st April 2015. What actually transpired behind the curtain is much for the people to speculate, but it is clear that the Sarawak Government knows that their rights over the State Sales Taxes were being overlapped by the Federal Government-imposed GST. With such an outcome, it is the people of Sarawak, especially the business community that must pay the prices with the double taxation due to the illegal imposition of GST, crippling our economic and business potential. The Sarawak Government must be answerable to the people of Sarawak who were being discriminated against under the illegal imposition of GST.

The economic problem of providing a living for the population must be solved if Sarawak is to have stability. However, due to the breached of our rights, the economies of Sarawak are sickening by the day due to the non-compliance of the agreed terms for the formation of the new Federation of Malaysia. For example, the illegal imposition of GST was a clear breach of the rights of Sarawak on Sales Taxes which is a State subject based on the IGC Report, Malaysia Agreement 1963, and Malaysia Constitution itself. Such illegal increases in assessments for rates would definitely frighten the businessmen. It must be kept in mind that, Sarawak Government has administrative duties like education, labor, health, and social services and would need a considerable amount of taxes to discharge those duties. Without any revenue, and the stolen revenue obviously, how is our government going to function at its high potential and capacity? Further, why should Sarawakian taxpayers pay the price for such discriminatory taxation? Living below our means is not an option as this is also a big concern for our current and future generation!

Sarawak must be exempt from the federal imposed GST which is illegal under State law. The Government of Sarawak must show its loyalty to the people and particularly to the business community by firmly implement the rights of Sarawak on Sales Taxes. Only then, the Government of Sarawak can help, by firmly following its declared policies of building up a climate of business confidence and industrial peace.

Sarawak agreed to form Malaysia because of the promises of economic development on which our political stability largely depends. The imposition of GST would severely jeopardize the economic objectives of what Sarawak wants to achieve through Malaysia, and Malaysia would have the end result of defeating the very objectives of political and economic stability which it was designed to establish. Sarawak being what it is, would find itself in an invidious position if the current Sarawak Government committed Sarawak in Malaysia without implementing the constitutional safeguards embodying the terms for rightful revenue from the State Sales Taxes. It will therefore be seen that Malaysia could be a grave financial liability to Sarawak.

IGC Report, Malaysia Agreement 1963 and Federal Constitution

In general, the Borneo territories secured the essence of almost all the requirements for financial agreements as outline in Annex A of the IGC Report, Item No.7 (i) and (ii), stated that Finance, etc., is a Federal subject except for State Sales Taxes which is subject to the arrangements set out in detail in paragraph 24 of the Report. Declassified documents on Malaysia revealed that the intention of such arrangement was that the level of Federal taxation in the Borneo States should be brought to the Federation of Malaya levels in graduated stages over a period of years, taking into account that the political expediency to dictate the taxation level could only be significantly raised when the result of greater expenditure is apparent.

Annex A of the IGC Report, Item No.7 (i) and (ii) outline that Finance, etc., is a Federal subject except for State Sales Taxes which is subject to the arrangements set out in detail in paragraph 24 of the Report. Under paragraph 24(1) of the IGC Report, “Taxation, including in particular customs and excise duties and taxes on incomes and profits, should be a Federal subject but each Borneo State should have the power to impose a Sales Tax, if it wishes, provided that any Federal sales tax would take priority over any State sales tax and provided that discriminatory rates would not be imposed on goods of the same type but of different places of origin. The level of Federal taxation in the Borneo States should be brought up to the Federation of Malaya levels in graduated stages over a period of years and the steps should not be grossly disproportionate. There should be ad hoc consultation with the senior officials concerned in the Borneo States regarding tax changes and in addition, the Borneo States should each be represented on a Malaysian Board of Income Tax.

Under paragraph 24(2)(i) Subject to the provisions of sub-paragraph (9) below relating to reviews, the revenues to be assigned to the States of Sarawak and North Borneo should, in addition to those listed in Part III of the Tenth Schedule of the present Federal Constitution, consist of the following revenues levied in the State: (e) State Sales Taxes;

After the IGC, this particular financial provision for taxation was then included in the Malaysia Agreement 1963 under Section 35(3)(a)-(b) which expressed that, “The Legislature of a Borneo State may also make laws for imposing sales taxes, and any sales tax imposed by State law in a Borneo State shall be deemed to be among the matters enumerated in the State List and not in the Federal List” and in the Fifth Schedule (Item No.7) which expressed that one of the additional sources of revenue assigned to the Borneo States is Item No.7 “State sales taxes”.

Finally, both of these similar provisions in the Malaysia Agreement 1963 were incorporated into the Malaysia Federal Constitution under Article 95B and the Tenth Schedule, Part V (Item No.7).

This content reflects the personal opinions of the author. It is accurate and true to the best of the author’s knowledge and should not be substituted for impartial fact or advice in legal, political, or personal matters.

© 2021 Dr Zulfaqar Sa'adi

Related Articles