40% revenue claim: Vindication and challenges ahead

THE recent High Court decision arising from the judicial review brought by the Sabah Law Society is indeed a pivotal milestone in Sabah’s long and troubled journey for the claim of her 40% revenue entitlement (described as “special grant” in the Federal Constitution) from the Federation.  For the first time since the formation of Malaysia in 1963, Sabah’s entitlement to 40% of the net revenue derived by the Federation from Sabah is taken to the centre stage of the High Court, and the judiciary as trustee and guardian of the Constitution, has spoken with clarity: such right to tax revenue sharing is not a political concession, nor a discretionary allocation, but it is a contractual turned constitutional right entrenched in Articles 112C and 112D of the Federal Constitution, flowing directly from the Malaysia Agreement 1963.

In the 107-page well reasoned and articulated judgment delivered by Judge Datuk Celestina Stuel Galid, it was held that by not undergoing any review of the 40% entitlement in respect of the 48 years from 1974 to 2021 pursuant to Article 112D(1), (3) and (4) of the Federal Constitution, the Federal Government and the Sabah Government were in breach of their constitutional duties. In other words, reviews at the intervals of five years or such longer period as may be agreed between the two governments is mandatory.

Yet, constitutional vindication is only the beginning.  Translating this legal affirmation into tangible fiscal justice viz revision of the annual special grant for the ensuing years and recovery of what Sabah was gravely shortchanged in the so-called “Lost Years” spanning nearly half a century, will put the inter-governmental goodwill and the structural limits of Malaysia’s prevailing federalism to test.
As the Minister who chaired the Sabah State Rights Review Committee from 2014 to 2018, I took the stance that the absence of review of the special grant every five years contravened Article 112D, and was thus unconstitutional. Therefore, to me personally, there was also a measure of vindication when the High Court reached the same conclusion.

Sometime in 2014, on behalf of the Sabah State Government, I wrote a letter to the Ministry of Finance of Malaysia seeking to reactivate the review of the special grant, as a result of which a meeting was convened in the Ministry’s office in Putrajaya.  I attended the meeting along with several State’s senior officials.  Thereafter, despite several reminders sent for a follow up meeting, the Ministry of Finance was completely unresponsive.  Since then, I realised that our pursuit of the 40% entitlement could only bear fruit with a top-down approach. With the advent of the said judgment, unless the Court’s decision is reversed on appeal, the Ministry of Finance will have no choice but to hold meetings with its counterpart in Sabah within 90 days, and to reach an agreement within 180 days from the date of the Order (17.10.2025).

The Lost Years and the Illusion of Compliance

From 1964 to 1968, Sabah received its special grant based on the 40% formula ranging from approximately RM4.9 million in 1964 to RM21 million in 1968.  A first review followed for the period 1969 – 1973 where the annual sum hiked incrementally to RM26.7 million in 1973 based on projected growth of the State’s economy. What did not follow, however, was constitutional compliance.  The mandatory review in 1974 as required by Article 112D(4) never took place.  Instead, a fixed and nominal annual sum equivalent to the 1973 grant was paid year after year, disconnected from Sabah’s actual economic contribution and wholly inconsistent with the constitutional design and purpose.

For 48 years, this arrangement persisted, quietly normalised, politically rationalised, and administratively entrenched.  The High Court was therefore correct to characterise this not as a technical lapse, but as a continuing breach of constitutional duty.  The court’s ruling has exposed a fundamental truth: Sabah was not merely underpaid but was systematically excluded from the revenue-sharing mechanism that was meant to safeguard its position within the Federation.

The First Practical Challenge: Establishing the Basis of Calculation

It is easy for one to say “our right is enshrined in the Constitution, just implement it” but the most immediate and formidable challenge lies in establishing the basis upon which the 40% entitlement is to be calculated.

Article 112C speaks of “net revenue derived by the Federation from the State”.  This deceptively simple phrase masks layers of complexity.  Over five decades, the federal revenue framework has evolved, new taxes were introduced, petroleum revenue arrangements altered, revenue collection centralised, and accounting classifications revised.  Accessing consistent, verifiable data across these years will require more than goodwill; it demands full transparency from federal authorities and the cooperation of federal departments that have historically guarded such information.

Without a mutually agreed methodology, Sabah risks being drawn into protracted disputes over what constitutes “net revenue”, which revenue streams should be included, and how deductions are to be treated. These questions do not have ready answers.  For example, how would the 38% Petroleum Income Tax and 24% Corporate Income Tax paid by Petronas based on their tax returns filed in Kuala Lumpur be apportioned as revenue derived from Sabah?  What about income tax paid by companies who operate vast oil palm plantation in Sabah with their headquarters in Johore?  Putrajaya may argue that these do not come within the definition of “revenue derived by the Federation from Sabah”.  This is where Sabah must insist on independent forensic accounting and not allow the exercise to be reduced to political bargaining.
Equally challenging is the dealing with Federal bureaucrats.  Deputy Chief Minister cum Finance Minister Datuk Seri Panglima Masidi Manjun recently revealed that the State Government has formally requested relevant Federal agencies 19 times for their revenue data, but were often responded with incomplete statistics, or simply plain delay. Bureaucratic resistance is certainly another obstacle to be overcome.

The Constitutional Reality: Rights Without Automatic Remedies

While the High Court affirmed Sabah’s constitutional entitlement, the Federal Constitution does not provide an automatic enforcement mechanism for arrears. Courts can declare rights and breaches, but the quantification and recovery of sums, particularly over decades, inevitably require executive action and intergovernmental agreement.

Federalism in Malaysia has always been executive-centric, with overwhelming fiscal control residing at Putrajaya.  Sabah’s experience demonstrates that constitutional rights without institutional safeguards, can be rendered inoperative by administrative inertia.

Sabah must therefore pursue not only compliance with the present ruling but also setting out clear Standard Operating Procedure agreed by both governments to ensure that future reviews under Article 112D are automatic, transparent and insulated from political expediency.

Political Constraints: Negotiating from a Position of Structural Disadvantage

Politically, Sabah faces an uneven negotiating table.  The political intrigue and power play may put Putrajaya in a much stronger bargaining position.  The federal government controls fiscal policy, budgetary allocations and most revenue streams.  Sabah, by contrast, must rely on negotiations conducted within a framework largely designed and dominated by the centre.

There is also the uncomfortable reality that Sabah’s claim, however legitimate, will be viewed in some quarters as fiscally disruptive or politically inconvenient — particularly if arrears for the Lost Years run into tens of billions of Ringgit. The temptation to “settle” through partial concessions, phased payments or re-labelled development grants will be strong.

Sabah must resist this.  Development allocations are not substitutes for constitutional entitlements.  Constitutional right must not give way to political expediency.

Federalism as Practised, Not as Promised

The deeper issue exposed by this dispute is the nature of Malaysian federalism as it has evolved in practice.  While Sabah agreed to be part of Malaysia with negotiated safeguards reflecting its distinct position, over time the Federation drifted towards centralisation — fiscally, administratively and politically.
Sabah’s 40% claim challenges this centralised norm.  If the Federation is unwilling or unable to honour these arrangements in substance, then the promise of Malaysia as a partnership of regions rings hollow.

A Test of the Malaysian Federalism

The High Court ruling is a legal victory, but the real test lies ahead.  Whether Sabah ultimately secures what it was denied for nearly five decades will depend on more than judicial pronouncements.  It will depend on whether Malaysia is prepared to confront the consequences of its own constitutional commitments.

This is not merely about money.  It is about the integrity of the Malaysian constitutional order.  Sabah has waited long enough.  The law has spoken.  The question now is whether the Federation will listen, and act. Temperate wisdom and strong resolve are vital to navigate the hard road ahead, a course inevitably intertwined with the prevailing political dynamics of the time.

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.