Report of The Inter-Governmental Committee, Malaysia/Financial provisions

by Commission of Enquiry in North Borneo and Sarawak Regarding Malaysian Federation

24. Financial Provisions

(1) 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 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 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.

(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:—

(a) import duty and excise duty on petroleum products;

(b) mechanically propelled vehicles and drivers’ licence fees for the period of the delegation of carriage of passengers and goods by land^[1];

(c) export duty on timber and other forest produce;

(d) export duty on minerals up to a joint total of royalty and export duty of 10 % ad valorem calculated in the manner laid down for the payment of export duty;

(e) State Sales Taxes;

(f) in respect of North Borneo only 30% of Customs revenue less revenue from import duty on petroleum products and from export duty on timber and other forest produce for so long as North Borneo is responsible for Medical and Health expenditure; and

(g) fees and dues from State ports and harbours.

(ii) It was noted that trade licence fees as imposed under the Sarawak Business Professions and Trades Licensing Ordinance and the North Borneo Trades Licensing Ordinance (Cap. 144) would be State revenue.

(3) North Borneo and Sarawak should receive a capitation grant as provided for in Part I of the Tenth Schedule to the Federal Constitution.

(4) North Borneo and Sarawak should receive a State road grant for the first two years after the application of Part VII of the Constitution at a rate to be agreed between the Federal and the Borneo Governments; thereafter the provisions of Part II of the Tenth Schedule should apply but so that—

(a) the average cost of maintenance should be that in the State concerned and should include an on-cost element for supervision and for the depreciation and maintenance of plant and equipment (excluding depreciation of any plant or equipment given free by the Federal Government);

(b) minimum standards of roads lower than that applicable in other States could qualify for the road grant; and

(c) roads maintained by local authorities at the expense of the State should qualify.

(5) If the rate of annual road grant for North Borneo finally agreed upon is less than $4,500 per mile in respect of 1,151 miles (representing the 1962 road mileage) the Federal Government should make good the short-fall in each year up to and including 1967.

(6) Subject to the provisions for review made in sub-paragraph (9} below in order that the Borneo State Governments should have enough revenue to meet the cost of State services, the State should receive as of right, where the assignment of revenues to the State would in 1963 have resulted in a deficit, an annual balancing grant equal to the difference between the estimated State revenue in 1963, including assigned revenue and statutory grants, and the estimated cost of State services in 1963, calculated as if the proposed constitutional arrangements had already come into force. The published Revenue and Expenditure Estimates for 1963 would be used as the basis of the calculations.

(7) Subject to the provisions for review made in sub-paragraph (9) below, in addition to the annual balancing grant, Sarawak should receive as of right revenue sufficient to meet the annual increase in the current costs of State services plus any sum required to offset any decrease in the State's revenue. During the first ten years this would take the form of an escalating annual grant; the amount of this grant would be fixed in advance for each of the first five years and would be decided at the end of this period by an independent assessor as described in sub-paragraph (9). In recognition of the fact that the Sarawak State Departments are still relatively undeveloped compared with their Malayan equivalents and because otherwise there would be no means of enabling them to develop to an acceptable level the escalating annual grant together with the natural growth in State revenue and revenue assigned will, until the first independent review, assure an expansion of State services of not less than 10% per annum provided examination of expenditure over the period 1959 to 1962 shows a rate of expansion in such services of not less than that rate. If the average percentage growth over the period 1959 to 1962 proves to be less than 10% per annum then the escalating annual grant shall be calculated so as to provide for a continued expansion at the same rate.

(8) Subject to the provisions for review made in sub-paragraph (9) below. North Borneo should receive each year a grant equal to 40% of any increase in Federal revenue derived from North Borneo and not assigned to the State over the Federal revenue which would have accrued in 1963 if these financial arrangements had been in force in that year. The sum payable would be calculated on the basis of actual revenue received in each year.

(9)(i) The following arrangements should be subject to renew by the Governments concerned and, in default of agreement, by an independent assessor, appointed jointly by the Federal Government and the Government or Governments of the State or States concerned and his recommendations would be binding upon each party.——

(a) the annual balancing grants referred to in sub-paragraph (6);

(b) the escalating annual grant referred to in sub-paragraph (7); and

(c) the grant equal to the percentage of the increase in Federal revenue referred to in sub-paragraph (8).

(ii) The assessor should, in carrying out his review, take into account not only the needs of the State concerned but also the financial position of the Federal Government. Subject to that, he should aim to ensure that his recommendations will result in securing as of right to the State or States concerned sufficient revenue to meet the cost of State services at their then existing level with such provision for their expansion as he thinks reasonable.

(iii) The first review should be undertaken in time to enable the assessor's recommendations to be implemented with effect from the beginning of the sixth year after the application of Part VII of the Constitution to the Borneo States, and once implemented should remain in force until superseded by implementation of the recommendations of a second assessor.

(iv) The second review should similarly be undertaken in time to enable the assessor's recommendations to be implemented with effect from the beginning of the eleventh year and should relate to the ensuing period of five years or such longer period as might be agreed upon by the parties concerned, and once implemented should remain in force until the end of that period and thereafter until superseded by implementation of the recommendations of a subsequent assessor.

{v) If, before the end of the period to which the second (or any later} review relates, or at any time afterwards, any of the parties desires a further review, but not otherwise, an assessor should again be appointed.

(vi) The Federal Government should be able on the occasion of any review to vary any of the assignments of revenue specified in sub-paragraph (2)(i) (a), (c) or (d), on the second or a subsequent review, that specified in sub-paragraph (2)(i) (b); on the second or a subsequent review this power should extend to any substituted assignment made on the occasion of a previous review, Where the Federal Government intends to do this, it should give the State concerned and the assessor notice of its intention, and the assessor should take the effect into account his recommendations.

(10) The Malayan Government agreed that the figure of $300 million should be accepted for planning purposes as the total of Federal and State development expenditure required in Sarawak for the five years after the inception of the Federation of Malaysia, and, subject to the amount of financial aid which might be forthcoming from the British Government and to the general availability of funds, undertook to use its best endeavours to enable this amount of development expenditure to be achieved.

(11) The North Borneo delegation mentioned that development expenditure in North Borneo should amount to $200 million during the first five years after the establishment of Malaysia in order to obtain a satisfactory rate of economic growth. The Malayan delegation noted this estimate and recognised that State resources under the proposed arrangements would be inadequate to reach this level of investment and that subject to the amount of financial aid which might be forthcoming additional funds from outside North Borneo would be required.

(12) The British delegation promised on behalf of the British Government that a grant of one and a half million pounds a year would be paid for five years after Malaysia Day towards the development of the Borneo States. This grant would be for the specific sum of one and a half million pounds a year and would not be to cover any gap in development finance. It would be taken into account at the ultimate financial settlement. How the grant was divided between the two Borneo States would be for the Government of Malaysia to decide. The British Government was extending this promise for five years on the basis that the Malayan Government was also extending aid for the same purpose for at least this period.

(13) Notwithstanding the provisions of Article 166(7) it was recognised that North Borneo and Sarawak would wish to specify certain property and assets they would wish to retain and discussions on this are proceeding. Where assets (including loans and investments) created from the proceeds of a State Government loan issue were retained by the State Government, the State Government would remain liable for the corresponding public debt. It was also accepted that Article 166 (7) of the Constitution should not be applicable to assets representing the unappropriated balances and reserves of North Borneo and Sarawak, which would remain State assets.

(14) Where State loan funds had been expended on what would become a Federal purpose on Malaysia Day the debt service charges should become a liability of the Federal Government except where the State concerned retained the asset in question under sub-paragraph (13).

(15) The principles of Article 166(2) and 166(3) of the Federal Constitution in their relation to land and buildings should apply mutatis mutandis in Sarawak and North Borneo and the principles of Clause (3) should also apply to land and buildings which were used for purposes which might become exclusively Federal after a lapse of time after the establishment of Malaysia (e.g. Medical and Health in the case of North Borneo).

(16) The agreement set out in sub-paragraphs (13) to (15) was reached on the understanding that the Federal Government would be responsible for payment of any contribution in lieu of rates in respect of buildings to which Article 166 (3) of the Constitution applies and also for the cost of upkeep. Where office buildings would be occupied only in part by Federal Departments the contribution in lieu of rates and the cost of maintenance would be borne between the Federal and State Governments concerned on a basis to be determined. The possibility of fixing a flat rate per square foot to cover these costs should be examined.

(17) The principle of Article 166 (3) should not apply to Government quarters other than institutional quarters used for exclusively Federal purposes. Where such quarters in North Borneo and Sarawak were occupied by officers serving in or seconded to Federal departments, the Federal Government would pay to the State Government concerned an economic rent on a basis to be agreed. The payment of an economic rent would not affect the question of rent to be paid by the individual officer. The same principles would apply where a Federal quarter was occupied by a State officer.

(18) Sarawak and North Borneo should have a right to raise loans within the confines of the State with the approval of the central bank for the time being of Malaysia, and Article 111 of the Federal Constitution should be amended accordingly.

(19) The Federal Government should accept liability for all current and future pensions (including gratuities and retiring allowances) payable by the Governments of North Borneo and Sarawak and for contributions to the Widows and Orphans Pensions Funds of the Borneo States in respect of officers serving in State and Federal Departments. This should not apply to pensions payable by Sarawak to His Highness the Rajah and his dependants and those future pensions for which either State expressly accepted liability. Similarly, the pensions payable by the State to officers of local authorities and statutory bodies would be Federal on the understanding, however, that the State would reimburse the Federal Government for such pensions, if the authorities concerned did not refund to the Federal Government that portion of the pensions liability which was due from them.

(20) With regard to Article 112 of the Federal Constitution in relation to its application to Sarawak and North Borneo—

(a) the power to approve the creation of posts, up to and including those in Division III of the Borneo establishments where the liability for payment of pensions, gratuities or retiring allowances falls on the Federal Government, should be delegated for one year at a time to the Financial Secretaries of the respective States to be exercised after consultation with the local branch of the Federal Establishment Office; this delegation to be subject to annual renewal at the discretion of the Federal Government and

(b) the Financial Secretaries of the respective States should, subject to annual renewal and consultation with the local branch of the Federal Establishment Office, have delegated power to create supernumerary posts in any Division of the Public Service, as might be necessary to accommodate returning scholars or local staff who were qualified for appointment or promotion to a grade for which there were no vacancies so as to facilitate implementation of the Borneanisation programme.

(21) The Financial Secretaries of North Borneo and Sarawak should consult the local branch of the Federal Establishment Office before creating posts of any grade for contract officers whose salaries and gratuities are borne entirely by the State Government.

(22) All salary scales, whether for permanent or temporary officers and whether or not retirement benefits were the liability of a State or Federal Government, should be subject to the approval of the Federal Government.

(23) The functions of the Auditor-General in respect of accounts of the States of North Borneo and Sarawak and State statutory bodies for the years up to and including 1968 should be delegated to the Directors of Audit in those States. The Reports on the State's accounts and those of the State statutory bodies should be presented to the Head of State concerned as well as to the Yang di-Pertuan Agong.

(24) Part VII of the Federal Constitution as modified to give effect to this Report should apply in North Borneo Sarawak not later than 1st January, 1965 except for Articles 105, 106 and 107 (Audit) and 111 (State borrowing) which should apply on Malaysia Day. The Committee considered that it is desirable that this Part should apply on 1st January, 1964, if this is practicable. The periods of time variously specified in this paragraph should begin from the date on which Part VII, as amended, came into operation in the Borneo States.

(25) Since Part VII of the Federal Constitution will not apply to the Borneo States on Malaysia Day, it is necessary to make transitional financial arrangements. The proposed arrangements are as follows:—

(a) until such time as Part VII of the Constitution is applied to the Borneo States, they should be responsible for all expenditure whether or not it relates to Federal or State services;

(b) all revenue accruing to or collected in the States which would accrue to the Federal Government under the terms of the Constitution as amended will continue to accrue to the Borneo States until Part VII of the Constitution applies;

(c) the Governments of the Borneo States should continue to accept liability for the payment of pensions and for all contributions to the Widows and Orphans Pensions and Provident Funds until Part VII of the Constitution applies;

(d) all assignments of revenue and statutory grants payable to the Borneo States in furtherance of this Report and under the Constitution should only be payable to the States when Part VII of the Constitution applies;

(e) all development projects in the Borneo States relating to what will be Federal services after Malaysia Day will remain liabilities of the States until Part VII of the Constitution applies;

(f) all equipment, stores and supplies ordered by the Governments of the Borneo States for what will be Federal services after Malaysia Day but for which the charges do not fall due for payment until after Malaysia Day shall be liabilities of the States until Part VII of the Constitution applies, but shall be the liabilities of the Federal Government of they fall due after that date;

(g) all assets and liabilities of the States which should properly become assets and liabilities of the Federal Government on Malaysia Day will remain assets and liabilities of the Governments of the Borneo States until Part VII of the Constitution applies;

(h) any expenditure which should, under the terms of the Constitution, be charged on the Federal Consolidated Fund on and after Malaysia Day shall not be so charged but shall, until Part VII of the Constitution applies, be charged on the revenues of the Borneo States and

(i) nothing in the foregoing should preclude the Federal Government from incurring additional expenditure on its own account in the Borneo States before Part VII of the Constitution applies.

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1. See item 10 in the Federal List in Annex A.