How State Governments Are Funded in Malaysia

When a state government in Malaysia draws up its budget, it starts from a rarely mentioned reality: the taxes that yield the most — income tax, the sales and services tax, customs — are not its to collect. Those sources fall within federal jurisdiction. What is left to the states, and how the gap is filled, is set out in black and white in the Federal Constitution.

Which revenue sources belong to the states?

Article 110 of the Federal Constitution gives each state the right to revenue from the sources listed in the Tenth Schedule. Part III of that schedule sets out these sources. Among them:

• Revenue from land, mines and forests;
• Revenue from certain licences (except those relating to water supply, motor vehicles, electrical installations and business registration);
• Entertainment duty;
• Fees and receipts for specific services of state departments;
• Rent of state property and receipts from the sale of land;
• Fines and forfeitures in courts other than federal courts;
• Zakat, fitrah and baitulmal and similar Islamic religious revenue;
• Revenue from toddy shops, and treasure trove.

This list explains why land is the financial backbone of most states. Land premiums, land tax and various land-, mine- and forest-related charges are among the few substantial sources that genuinely lie in the hands of the states.

What grants must the Federation pay?

Article 109 requires the Federation to pay two main statutory grants to each state: the capitation grant and the state road grant.

The capitation grant is calculated by population, at the rates set out in Part I of the Tenth Schedule:

Population band	Rate per person
First 100,000 persons	RM72.00
Next 500,000 persons	RM10.20
Next 500,000 persons	RM10.80
The remainder	RM11.40

The state road grant, meanwhile, is calculated by multiplying the average cost of maintaining a mile of state road (at the minimum standard set by the Federation after consulting the National Finance Council) by the number of eligible miles of state road. Fixed rates, as with the capitation grant, mean their value does not necessarily keep pace with the growth of costs or the economy over time.

The Ministry of Finance divides grants to states into two categories: statutory grants and non-statutory grants. Besides the capitation and road grants, statutory grants also include the State Reserve Fund (Article 109(6)), the assignment of tin export duty (Article 110(3)), the Revenue Growth Grant (under the Revenue Growth Grant Act 1977), and the special grants to Sabah and Sarawak (Article 112C). Non-statutory grants, meanwhile, include contributions in aid of rates (Article 156) and loans to states (Article 111(2)).

Why do most states depend on the Federation?

The cause is structural. Because the most productive tax bases are collected by the Federation, the total revenue a state can raise is far smaller than the Federation’s. Analysis by ISEAS – Yusof Ishak Institute estimated that in 2023, state governments collected on average about RM926 per capita, which is around 10.3% of federal revenue estimated at RM8,969 per capita (according to Table 1 of that study).

It should be noted that the narrative text of that ISEAS study cites, in one place, a higher figure for federal revenue (RM28,153 per capita) that is not consistent with the stated ratio of 10.3%. It is the figure of RM8,969 in the study’s table that is consistent with that ratio and with the actual estimate of federal revenue, and that is the figure quoted here; the official figure should be checked against Ministry of Finance documents before being taken as definitive.

Reliance on land is also high. The same study estimated that land-based sources accounted for about 82% of Selangor’s revenue in 2022, while states such as Pahang and Kelantan derived in the range of 18–20% of their annual revenue from forests. By comparison, the capitation grant amounts to little — Selangor was reported to have received about RM77.2 million in capitation grant in 2022.

There are various views on this arrangement. Some argue that states should be given more fiscal space and revenue autonomy; others emphasise that federal allocations and transfers are indeed guided by the Constitution and are intended to balance capacity between states. This article takes no position; it merely sets out the constitutional framework and the reported figures.

What is different about Sabah and Sarawak?

The financial position of Sabah and Sarawak is shaped by the terms of their entry into the Federation in 1963. In addition to the sources in Part III, both states are given additional revenue sources under Part V of the Tenth Schedule, among them:

• Import duty and excise duty on petroleum products;
• Export duty on timber and other forest produce;
• Export duty on certain minerals, so long as the state royalty is below 10 per cent ad valorem;
• State sales taxes;
• Fees and dues from non-federal ports, and receipts relating to water supply.

Both states also receive special grants under Article 112C. Part IV of the Tenth Schedule sets out, for example, an annual grant of RM5,800,000 to Sarawak, and for Sabah a formula relating to two-fifths of the net federal revenue surplus derived from Sabah. Article 112D provides for these special grants to be reviewed from time to time.

The ISEAS study estimated Sarawak to have the highest per-capita revenue among all states — about RM4,414 per resident — attributed in part to the right to collect state sales taxes, including on petroleum products. The value, interpretation and implementation of these rights — including in the context of the Malaysia Agreement 1963 — are matters that continue to be discussed and negotiated between the Federal government and the two states.

What next

To grasp the full picture, three steps help. First, read Articles 109, 110 and 112C of the Federal Constitution together with the Tenth Schedule directly — all of them determine who collects what. Second, examine each state’s budget, which usually lists land revenue, forest revenue and federal grants separately. Third, follow the ongoing discussion on fiscal decentralisation and the rights of Sabah and Sarawak, as it involves various positions worth understanding from each party’s official sources.

The figures in this draft are drawn from the constitutional text and the analyses set out in the source list. Budget numbers change every year; always check the latest official documents before drawing any conclusions.