JANUARY 4 — I will not be doing justice to the topic of Sabah’s 40 per cent revenue entitlement if I were to leave it at my last week’s article. So much has been spoken and written about this constitutional issue in the past one decade, yet it still remained the hottest subject raised in the most crowded Sabah State Elections concluded recently, continued to be harnessed by political parties, national and local parties alike, in seeking for voters’ support.
For many years, this fiscal quagmire has put the Federal and Sabah Governments between a rock and a hard place. As the saying goes, one man’s meat is another man’s poison, while it is challenging for the Madani Government to honour its constitutional duty owed to Sabah and at the same time appease the States in West Malaysia which are increasingly demanding for similar treatment, it is equally challenging for the GRS led Sabah Government to be seen as firm in securing what is rightfully ours or risk the loss of support, especially so when the 16th general election (GE16) is on the near horizon. More importantly, unless the Kota Kinabalu High Court judgment is reversed on appeal or stayed, the two governments are mandatorily required to agree on the amount and terms of the special grant within 180 days from October 17, 2025. The clock is ticking.
Of all challenges, managing the people’s perception is perhaps the trickiest thus require utmost tactfulness.
Due to the Putrajaya’s reluctance in revealing the complete data and statistics in relation to the actual revenue derived from Sabah, computation on the 40 per cent net revenue entitlement could only be done by way of an assumption-based-estimation as opposed to factually precise arithmetic. Such estimate, as it were, can nevertheless be a useful fiscal benchmark as well as a negotiation reference point.
It is paramount for both the Federal and Sabah Governments to be transparent in their approach, lack of which the Sabahans may be disillusioned into believing that the annual special grant amount, especially the cumulative amount accrued over the period of 48 years from 1974 to 2021 often described as “the lost years”, is astronomical. If such public perception persists, whatever fair amount and the mode of payment that may be agreed between Putrajaya and Sabah will still be seen as a shortchange for Sabah, for which Sabahans would pin the blame on state leaders for their failure to stand up to Putrajaya, and pour their anger to the federal leaders for disdaining our constitutional right. Similarly, if the historical and constitutional foundation of such revenue sharing right is not explained to fellow Malaysians on the other side of South China Sea, they will certainly cry foul and ask “what about the 40 per cent for our state?”
Well, the short answer to that is: such revenue right together with the sharing formula is enshrined in Articles 112C and 112D read together with Part IV of the Tenth Schedule of the Federal Constitution, such fiscal provisions are incorporated into the Federal Constitution pursuant to the Malaysia Agreement 1963 (MA63). In historical context, this is what Sabah (then North Borneo) had bargained prior to the formation of the Federation of Malaysia. For the benefit of non-Sabahan readers, such two-fifth revenue sharing formula is peculiar to Sabah only and not accorded to any other states of the Federation.
What does “revenue derived from Sabah” mean?
Though the word ‘revenue’ is not expressly defined in the Federal Constitution, its plain and literal meaning includes tax revenue and non-tax revenue. When the word ‘revenue’ is referred to in Part III and Part V of the Tenth Schedule to the Federal Constitution which lay out the SOURCES OF REVENUE ASSIGNED TO STATES and ADDITIONAL SOURCES OF REVENUE ASSIGNED TO STATES OF SABAH AND SARAWAK respectively, it includes non-tax revenue in the forms of royalties, fee and charges. Reading the Constitution as a whole, ‘revenue’ whenever mentioned, must include non-tax revenue which extends to dividends collected from Federal statutory bodies and GLCs.
As regards the 40 per cent entitlement, precursory to MA63, it was written in the Inter-Governmental Committee Report that “The sum payable would be calculated on the basis of actual revenue received in each year”. In the absence of any express exclusion, “actual revenue” must include dividends.
Petronas is wholly owned by the Federal Government. Its annual dividends are a major component of federal revenue. From a constitutional and accounting standpoint, this question is unavoidable: If Petronas’ profit are substantially derived from petroleum extracted in Sabah, can those dividends be excluded from “revenue derived from Sabah”?
It must be noted that the word “derived” denotes “originating from”, “arising out of” or “attributable to”. By contrast, the word “collected” carries a narrower meaning viz revenue directly collected within Sabah.
Therefore, exclusion of such dividends tantamount to re-characterising revenue devoid of its economic origin, a position that is irreconcilable with the spirit of federalism embodied in MA63.
Chasm between Federal and State narratives
On November 9, 2025, in an impromptu exchange with a member of the public at Gaya Street, Kota Kinabalu, Prime Minister Datuk Seri Anwar Ibrahim claimed that the Federal Government collected about RM10 billion in revenue from Sabah but allocated around RM17 billion to the State. 3 days later, the then Deputy Chief Minister Datuk Seri Panglima Jeffery Kitingan disclosed that according to official data, annual revenue derived from by the Federal Government from Sabah exceeded RM50 billion. He further claimed that would mean RM20 billion was bound to be returned to Sabah according to the Constitution.
Juxtaposing the figures given by the Federal and State leaders, one will immediately see the whopping difference of RM40 billion! Despite not privy to how the figures were arrived at, I believe both figures were based on established accounting principles, though may not be correctly applied. Perhaps one took into account dividend revenue whereas another did not.
Sabah’s 40 per cent revenue entitlement is a form of outright grant which is to be paid to the State Consolidated Fund, upon which the State Government has the absolute power to utilise as it thinks fit. The RM17 billion mentioned by the Prime Minister consists of development fund, operating expenses and emoluments for Federal agencies in Sabah, probably also includes capitation grant, road grant and the RM600 million special grant budgeted for 2026.
Deduction of revenue assigned to the State
Succinctly put, the 40 per cent entitlement is 40 per cent of the increase in net revenue derived by the Federation from Sabah over the net revenue which would have been so derived in the year 1963, if such revenue sharing arrangement had been in operation in 1963. You may have to read twice to decipher the revenue sharing formula.
The phrase “net revenue” is defined as revenue accrues to the Federation less the amount of assigned revenue received by the State. As set out in Part III and Part V of the Tenth Schedule to the Federal Constitution, “revenue assigned to the State” includes royalties and State Sale Taxes (SST). This means that the 5 per cent oil royalty and SST levied for sale transactions in relation to oil palm, oil and gas and related commodities, estimated at about RM4 billion per year are to be deducted from the gross revenue before computation of the 40 per cent.
Financial position of Federation and needs of the State
Article 112D(2) requires financial position of Federal Government and needs of the State to be taken into account in any review of the 40 per cent entitlement. It speaks of a need-based assessment grounded on consideration of Sabah’s structural disadvantages, development need, demographic and geographical circumstances, at the same time is mindful of the overall fiscal sustainability of the Federal Government. In constitutional terms, it denotes a mere contextual constraint, not an overriding discretion to depart from the constitutional formula. Such provision permits measured fiscal adjustment, not renegotiation of the constitutional bargain.
Conclusion
Ultimately, Putrajaya ought to appreciate that the 40 per cent entitlement was deliberately crafted to safeguard Sabah’s position in the Federation. Technical disagreements on interpretation of key phrases cannot be allowed to mutate into delay and dilution of that bargain. Constitutional provisions were intended to guide implementation, not to defeat entitlement. It is time for Putrajaya to faithfully honour what is rightfully Sabah’s, even when doing so is fiscally or politically uncomfortable. Anything less risks deepening public distrust, widening the federal-state divide, and eroding the very foundation upon which Malaysia’s federalism rests. — The Borneo Post
* Datuk Seri Panglima Teo Chee Kang is a former Minister of Special Tasks in the Sabah Chief Minister’s Department. He is also the former president of Liberal Democratic Party and former state assemblyman for Tanjong Kapor.
** This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.
