LOCAL councils commonly referred as Pihak Berkuasa Tempatan (PBT) are important providers of local infrastructure and enforcers of rule of law. However, the majority of non-Federal Territories-based PBTs are not financially sustainable, jeopardising their ability to execute their obligations.
Henceforth, the federal government had to assist PBTs through financial grants and federalising certain PBTs’ roles. However, the methodology of assistance practised by the federal government widens both the federal government’s fiscal deficits and development inequality.
Financial health of PBTs
For the year 2019, about 71 PBTs suffered an operational deficit worth RM716 million. District councils make up 54% of all PBTs in deficit. However, eight city councils represent 24% of the total deficit amount. The numbers of financially stressed PBTs will be higher without the federal government grant worth RM430 millions to PBTs.
Federal government grants to PBT are divided into two categories: operational grants and grants for traffic lights and streetlights. The operational grants for PBT represents 66% of total grant value from the federal government. In the year 2019, Kangar Town Council (MP Kangar) was in deficit of RM2.2 million but made a surplus of RM700,000 after receiving a federal grant worth RM2.9 million.
Meanwhile, 37 PBTs had revenue below RM10 million with 70% of them located in Borneo-Malaysia. Contrary to popular belief, PBTs in Borneo-Malaysia received only about 20% of the total PBT grant from the federal government. Rural-based PBTs with large jurisdiction areas but small population struggle to provide basic services.
Source of PBTs’ financial constraints
Primary sources of income for PBTs are property assessment taxes, business licence and planning fees. Secondary income for PBT consists of rental and fees such as parking space, public markets, public food courts, signboards, advertisements, etc. Property assessment taxes commonly known as “cukai pintu” are charged biannually in the month February and August of each year.
The uncollected property assessment tax rate per annum is 13.5% for city council, 15.8% for town council and 25.7% for district council. Besides that, PBT has a high ratio of collection cost versus tax collected.
The PBTs spend substantial amounts for operating payment counters, legal departments and commission for third-party payment channels. These collection costs reduce available funds for PBTs.
The majority of property assessment tax errands can be categorised into three groups of people. The first group are property speculators that own multiple properties in multiple towns.
Property speculators have the worst track record of paying JMB maintenance fees, quit rent and property assessment taxes.
The federal government allows deductible expenses including property assessment tax on the rental income. The tax deductible does not reach the PBTs because LHDN accepts property assessment bills without proof of payment for tax deductions.
The second group are people willing to pay but failed to receive a tax assessment bill.
Examples include senior citizens staying with their adult children, retirees with second property in big cities for rental income for retirement and house owners residing overseas.
Most PBTs provide a unique account number instead of MyKad, making it harder to retrieve the online bill.
The third group are zero income individuals that inherited the property from deceased family members. These groups are made up of widowed senior citizens or precarious youth. They do not have sufficient income to pay the property assessment rate.
Impact of PBTs’ financial constraints
The adverse impact of PBTs’ financial constraints can be subdivided into 3 categories: skipping essential payment, minimising development expenditure and increasing non-taxes revenue.
Firstly, certain PBTs with chronic cash flow problems prolong payments to suppliers, contract and utilities. This hurts local businesses and delays wage payment by contractors to workers. The cumulative outstanding arrears by PBTs to Indah Water Konsortium (IWK) PBTs until the year 2020 was RM13 million.
Secondly, minimising development expenses by PBTs translates into poor road conditions, absence of streetlights, clogged drainage, weak solid waste management, etc. The insufficient funds reduce a PBT’s ability to increase the number of enforcement officers to enforce food cleanliness and public hygiene.
These increase the probability of traffic accidents, mosquito-related diseases, food poisoning and rodent infestation, putting pressure on federally operated public healthcare. PBTs’ pursuance of legal measures to recoup outstanding taxes is straining the federally funded judiciary system.
The inability for PBTs to employ sufficient enforcement officers allows the rule of thugs to thrive such as illegal parking fees collectors, and illegal plastic burning centres protected by thugs. PBTs undertake inhumane treatment of stray animals due to funding restrictions for animal shelters.
Land in semi-urban and rural areas are cheaper but new industries refuse to invest because of weak local infrastructure. Thus, semi-urban and rural areas suffer from weak employment and income capacity, forcing outward migration to overcrowded urban areas.
Finally, PBT will squeeze non-taxes revenue such as monetising social obligations and increasing rentals. PBT either introduces or increases rental rates from public food courts, public markets, town halls, football fields and public toilets. This leads to a higher cost of living for the local people.
Federalise PBT’s assessment tax collection
The federal government through the Inland Revenue Board (LHDN) should take over the collection of property assessment taxes. The PBTs could submit a tax invoice to LHDN which could be collected together with the annual income tax.
The consolidated tax channel to pay the property assessment tax for multiple properties reduces compliance cost and time. Instead of providing tax refunds to property speculators, LHDN can transfer the property assessment tax to respective PBTs.
Besides that, LHDN has better resources to ensure tax collection compared to PBTs from errands individuals.
Later this year, LHDN will be introducing a compulsory Tax Identification Number (TIN) for Malaysians above the age of 18 years.
However, LHDN must avoid unique TIN by synchronising with MyKad to make it easier for people to remember. The ease of tax payment improves voluntary tax payment and collection amount simultaneously.
Generally, LHDN over-deducts for withholding tax from monthly wages which will be refunded after annual tax filing. Collection of property taxes assessment by LHDN reduces
tax refunds for most people.
However, individual taxpayers do not have to save up or curtail spending for the biannual property assessment tax. Henceforth, improving cash flow for the majority of the individual taxpayers.
Synchronising income tax with property assessment taxes will provide the tools to evaluate if the individual genuinely does not have the financial capacity to pay the property assessment taxes. Federal government should provide targeted payment assistance to these financially incapable individuals.
Moving forward
Rural PBTs require greater funds to improve local infrastructure and governance before reaching the inflection point for organic growth in financial and administrative capacity.
The deep deficit of urban PBTs is crowding out funds from the federal government. The fundamental issue for PBTs is weak property assessment tax collection.
Henceforth, the federal government should federalise PBTs’ property assessment tax through LHDN. Subsequently, PBTs grants can be targeted to rural and semi urban-based PBTs.
The federal government should also provide targeted assistance to pay property assessment tax for zero income households. This is an optimum methodology as it provides maximum results with minimal resources. – The Vibes, February 8, 2022
Sharan Raj is a human rights activist, environmentalist and infrastructure policy analyst
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