Understanding Sabah’s tax revenue sharing entitlement

Understanding Sabah’s tax revenue sharing entitlement

3 hours ago

Joe Samad

Such issues may or may not affect Sabah lives today but could have far-reaching future consequences.

From a layperson’s perspective, following the legal back-and-forth in the Malaysian courts can be rather taxing.

It often appears to be a war of words, legal arguments, constitutional interpretations and courtroom strategies, all aimed at persuading the presiding judge or judges.

Beneath the pomp and pageantry inherited from the British legal system, however, lie issues of profound constitutional significance that may or may not affect our lives today, but could have far-reaching consequences for generations to come.

When Malaysia was formed in 1963, several safeguards were negotiated to protect the interests and autonomy of North Borneo (now Sabah). Among these was Point 11 of the Inter-Governmental Committee (IGC) Report, under the heading tariffs and finance.

It provided that “North Borneo should retain control over its own finances, development and tariffs, with the right to formulate its own taxation policies and raise loans on its own credit”.

One can argue that the spirit and substance of this safeguard are found in the constitutional expression of Article 112C of the Federal Constitution, read together with Section 2(1) of Part IV of the Tenth Schedule and Clauses (1), (3) and (4) of Article 112D.

These provisions form the constitutional basis for Sabah’s entitlement to a special grant equivalent to two-fifths (40%) of the net revenue derived by the federal government from Sabah, subject to the relevant constitutional provisions.

Former Sabah minister Yap Pak Leong revived the historical significance of this arrangement, maintaining that the 40% revenue-sharing arrangement was a fundamental condition underpinning Sabah’s decision to join in the formation of Malaysia.

“Right from the start, I emphasised this share of 2/5 revenue to be a condition for Sabah to become part of Malaysia.”

He further stressed that without this safeguard being enshrined in the Federal Constitution, Sabah would not have agreed to participate in the formation of Malaysia.

The role Sabah and Sarawak played in forming Malaysia must be recognised, unlike the federated states of Malaya. The Borneo states negotiated separate terms under the IGC, one of which is Sabah’s entitlement to 40% revenue sharing of all taxes collected in Sabah.

From what I understand, the federal government is not objecting to Sabah’s right to the 40% revenue sharing, but to the High Court judgment on Oct 17, 2025, in favour of the Sabah Law Society (SLS), directing the federal and state government to commence a review within a stipulated period.

Prime Minister Anwar Ibrahim himself promised during the last state election that the government would not appeal the High Court’s decision, but for whatever reasons, it seems he has reneged on that promise to the Sabah people.

On another point, one cannot help but question the position taken by the state government in these proceedings.

Having entered the case as an intervener at a relatively late stage, the state government appears caught between competing legal and political considerations.

Yet, arguably, it should have been at the forefront pursuing Sabah’s constitutional entitlement.

The state government possesses the political mandate, institutional authority and constitutional standing to negotiate directly with the federal government.

Rather than allowing the matter to become an extended courtroom battle initiated by SLS on behalf of the people of Sabah, it should be exercising that authority to secure a meaningful and just resolution for Sabah’s 47 “lost years”.

In another case, another NGO, Sabah Action Body Advocating Rights (Sabar) has taken the federal government to court on February 27, 2025, disputing the validity of the Territorial Sea Act (TSA) 2012, which limits the State’s maritime boundary to just three nautical miles.

While the Sabah state government may have its own reasons for not initiating legal challenges regarding Sabah’s rights, and Sabahans are not privy to their arguments, it is only fair to ask where the Sabah government stands in relation to these key court challenges.

The position is unlike in Sarawak, where the state government has led similar challenges.

Importantly, after more than six decades since Sabah agreed to become a part of Malaysia, one uncomfortable reality remains: according to official statistics, Sabah continues to record the highest poverty incidence in the country.

That is a sobering indictment of the development gap that persists despite Sabah’s immense natural resources and its contributions to the Malaysian federation.

The legal arguments may continue. Appeals may be filed, constitutional provisions may be debated, and lawyers may argue over jurisdiction, procedures and remedies.

But beyond the courtroom, ordinary Sabahans continue to face the realities of poverty, inadequate infrastructure, water and electricity shortages, and limited economic opportunities.

The fundamental question is this: after more than 60 years in the Malaysian federation, should Sabahans still have to fight in court for constitutional assurances that were meant to protect their interests from the very beginning?

The 40% entitlement should not be treated as a political bargaining chip, nor should its fulfilment be reduced to a battle of legal technicalities. It is a constitutional matter rooted in the historical terms and safeguards surrounding the formation of Malaysia.

It is about justice, constitutional accountability and the future of Sabah.

The people of Sabah have waited long enough. Following Lord Hewart CJ’s well-known dictum, “justice must be seen to be done”.