TOPIC 8

FINANCES OF
LOCAL
AUTHORITIES IN
MALAYSIA
At the end of this chapter, students should be able
to understand:

Definition of financial autonomy

Local government sources of revenue
A closer look at Assessment Tax
Definition of Assessment Tax
Problems dealing with Assessment Tax
Financial challenges faced by local government
 DEFINITION OF FINANCIAL AUTONOMY

 Local government financial autonomy refers to the

ability of local government jurisdiction to set tax rates
and establish the revenue base without outside
influence as well as having the ability to provide the
service levels that are demanded by the jurisdiction’s
citizens.
 Financial autonomy also relates to the ability of local
government to raise enough revenues from the local
economy and then to determine how to spend those
revenues
 FORMS OF FINANCIAL AUTONOMY
 1.Self-financing or cost recovery through user
charges
 2.Co-financing or co-production arrangements through
which the users participate in providing services and
infrastructure through monetary or labor contributions
 3.Expansion of local revenues through property or
sales taxes or indirect charges
 4.Intergovernmental transfers that shift general
revenues from taxes collected by the central
government to local governments for general or specific
uses and
 5.Authorization of municipal borrowing and the
mobilization of either national or local government
resources through loan guarantees.
▧ Revenues of Local Authorities
Local government in Malaysia has three main sources of revenue

1) Taxes.
Property taxes
Malaysia has classified all local authorities income
into 6 categories by Ministry of Housing and Local
Sources 2) Non taxes.
Government:
of Licenses,
1. Assessment rates (land revenue).
Revenue Summonses
2. Licenses. (for business license)
3. Rentals. (Night market lot)
3) Financial grants. 4. Car parking charges, compound for do not have
Upper level
government coupon.
5. Government Grants
6. Loans.
Sources of Revenues in Local Authorities
 two sources of revenues:
1. Land based revenue and
2. Non land based revenue

1. Land Based Revenue

• It is know as property or assessment tax. ( Owners of land, building and house)
• Tax rates can different of local government units as long as they are not ultra vires then law
• Imposed at differential rates according to location. Such as Kuala Lumpur and Raub are different rates.
• According to usage of land, Industrial and commercial land pay higher than residential land.
• Local Government Act 1976 (section 130 (a)) ;
 Not more 35% levy of annual values rate of property for peninsular (apart those in Johor)
 While not more 5% levy of improved values property.
• Owner pays depends on location of property
▧ Additional Information of Land Based Revenue :
 Fees collect twice a year on 28 Feb an 31 Aug
 Fined will 5% charged from total if fail to pay
 Transportation and storage costs will be borne by the property owner
 Council also can auction off seized goods
 Council can take legal action against property owner if they fail to pay.
 Assessment fees are collected biannually and should be
paid by Feb 28 for the first half of the year and Aug 31 for
the second half.
 Ratepayers who fail to meet the deadline will be fined 5% of
the total amount due.
 Errant ratepayers are issued a notice called an E Form,
informing them that they are required to pay within 15 days
of issuance of the notice.
 If payment is not received, the council will issue a warrant (F
Form) with an inventory and notice (G form).
 If payment is still not made after seven days from the date
the G Form is issued, the council can seal or seize
moveable assets in the premises.
 The cost of hauling and storage will be borne by the property
owner.
 The council can also auction off seized items at any time
deemed suitable, and the cost of the auction will be charged
to the property owner as well.
 Under Section 156 of the Local Government Act 1976 (Act
171), the council can also take legal action against the
property owner
 ▧ Non Land Based Sources of Revenue
1) Licences and Permits
▧ Licenses can be categorized as processing and manufacturing. Such as in business industries, food manufacturing, hotel, entertainment and food
stalls.
▧ The main purpose are to control the establishment, ownership and business activities
2) Fees and Charges
▧ Local authorities can impose charges for service provided such as rework the road another example is parking with coupon
▧ They can put and change their own charges
3) Rentals
▧ LG are able to raise rentals during economic booms when get high demand.
▧ For an example MD RAUB earns revenue from its market spaces for night bazaar during Ramadhan, food court and futsal court
4) Compound notice and fines
▧ Compound for every council are different
▧ Such as at Petaling Jaya compound for illegal parking is MYR 100.00
5) Interest and Investment earning
▧ Some of local authority have their own special in investment. Mostly focus on Bursa Saham Malaysia.
6) Loans
▧ The can apply the loans but need get approval from parliament
NEXT FOR
EXAMPLE
EXAMPLE ;-
1. LICENCES AND PERMITS

2. FEES AND CHARGED

Batu Pahat, Johor
3. RENTALS
In Raub, Pahang

4. COMPOUND AND NOTICE

In Petaling Jaya, Malaysia.
5. INTEREST AND INVESTMENT EARNING
In Melaka,

6. LOANS
Terengganu, Malaysia
Types of Financial Aid
• They are two types financial aid provided and also under the types have receive 5 types grants.
A. From State Government
1) Annual Equalization Grant
▧ The federal government compulsory give this grant to local government through their state with State Grants
▧ LG for Sabah and Sarawak do not receive this grant
▧ The formula allocating this grant is based on two criteria – total population and total revenue.
▧ Fiscal needs factors are such population density and size also poverty rate, socio economic development.

2) Development Project Fund

▧ All LG are entitled for this grants
▧ It is mainly utilized to implement socioeconomic project. Such as recreation parks, social facilities and bus
station
B. From Local Government
3) Launching Grant
▧ This grants is to help local government restructure themselves, upgrade facilities, and buy equipment.
▧ The grant is given outright to a local government once it is restructured and only once.
4) Drain maintenance
▧ Allocation All local government receive to maintain and upgrade their drains and encourage flood mitigation
activities to control frequent flash floods.
▧ A drainage and sewerage tax can be attached to the assessment tax, the rate only 5% of the annual or 1% of
the value add to cover local government drainage and sewerage expenses.
5) Road Grant
▧ All LG are entitled for road maintenance grants.
▧ Non Federal roads are considered state roads and LG can claim from state government for upkeep the roads
▧ Roads grants are calculated based on average cost of 1.6 kilometre of road.
▧ To get a grant, LG need to apply to the state government
▧ The list of approved roads is the submitted to the federal Treasury for payment of the annual road maintenance
grant.
Financial Constraints by LA
1. Assessment tax is inelastic based on land of every local authorities
2. It is revalued once in 5 years and only with approval of state government.
3. LG also have problem in updating valuation of properties and need to carried out by manually
4. A high proportion areas in property tax.
▧ People not pay because:
▧ Lack of enforcement
▧ Accessibility and distance paying on time
5. Unnecessary expenditure such as spending a lot of money on landscaping, building markets without getting
approval of public
6. Provide better and more good services to people
7. Smaller councils have no way to increase their autonomy
8. Local councils have to undertake functions which are not their responsibilities
9. The billings and the tax payments are computerized
 Financial Challenges faced by local government

▧ Local authorities have to provide better and more sophisticated

services to the people.
▧ .Smaller councils have no way to increase their autonomy since they
are not in a position to get loans or sell securities.
▧ .Local councils have to undertake functions which are not their
responsibilities such as nabbing illegal workers, confiscating pirated
discs.
▧ 9.In most local governments in Malaysia, only the billings and the tax
payments are computerized. Because the taxpayer’s valuation records
are kept manually, any enquiries on valuation calculation, appeal,
become difficult to entertain. So, most local authorities find it difficult to
send letters of reminder to delinquent taxpayers.
Ways to Overcome Financial Problems

1. Improve tax collection such as updating their valuation lists.

2. More business oriented and try to joined venture in private sector
3. Acquire loans from financial institutions to undertake any project and
business
4. Community participation should be encourage to undertake
community
5. Pre budget dialog for concerned citizens to ensure no wasteful
expenditure
 Final exam questions :

▧ Problems of local authorities in collecting the revenue at the local

level

▧ Attitude if the public

▧ Lack of staff
▧ Accessibility and distance of payment lack of enforcement
▧ People do not deem local government an important institution
▧ Lack of proper records and updated on property owners
Weaknesses of the financial management system in Malaysia
Local Government

▧ A lot of unnecessary expenditure such as spending a lot of

money on landscaping, building markets without getting approval
from the public
▧ Limited financial resources
▧ Debts
▧ Smaller council have no way to increase their autonomy since
they are not in a positions to get loan or sell securities
▧ Lack of staff trained in financial management
▧ High cost in the maintenance of facilities especially in the rural
areas taxes