Local government refers to the third level of government structure of Malaysia after the

federal and the state government. According to the constitution, local government is in under
supervision of state government through executive councillor. However, Federal government
still has some power and influence on local government through Ministry of Housing and
Local Government. In case of Sabah, local government in Sabah has controlled by State
cabinet under the Ministry of Housing and Local Government and local government in
Sarawak lies under the Ministry of Health and Environment.
The table below shows the constitutional division of powers between federal and state
governments :-

Source: Commonwealth Journal of Local Governance, Issue 1: May 2008

Local government in Malaysia categorized to three categories, which is District Council,

Municipal Council and City Hall (Dewan Bandaraya). Whereas both District and Municipal
Council ruled by Yang Di Pertua (YDP) and City Hall lies under power of Mayor (Datuk
Bandar). Every form of local government refers to 3 major Act which are Local Government
Act 1976 (Act 171), Street, Drainage and Building Act 1974 (Act 133), Town and Country
Planning Act 1976 (Act 172) and Evidence Act 1950 (Act 56). According to Act 171, Local
government has the power to collect taxes, to create laws and rules and to grant licenses and
permits for any trade in its area of jurisdiction, in addition to providing basic amenities,
collecting and managing waste and garbage as well as planning and developing the area
under its jurisdiction. Early, before 1985 there were 373 Local Governments in Malaysia. By
1985 the number of Local Government reduced to 90 caused by the restructuring. Now,
developments and rapid changes in economy had made the total number of Local government
increase to 145.
Referring to the history of Local government, there has been an election in choosing the local
administrators before 1960s. After 1960s the election was stopped and the administrator of
local government has been chosen by the state government. Local government in Malaysia
thus operates within a centralized political system that does little to encourage autonomy or
public participation at the local level (Phang Siew Nooi, May 2008). In current situation, state
and local government in Malaysia operates under politics, financial and economic framework
which subordinate to the federal government.

Starting 1976, a Royal Commission of Enquiry has been establish to investigate on Working
on Local Authorities in West Malaysia in order to redistribute the responsibilities between
tiers of government and greater community participation. This makes the local government
face difficulties in meeting the challenges of changing global environment. Moreover,
autonomy and capacity of local government has been further constrain by handing over the
burdensome services from central government such as reducing urban poverty and the need
to addressing a rise in the nation’s urban crime rate. These additional activities strained the
local government’s financial and human resources. This has been worsened by the growing
population in urban and municipal area. This also makes the performance of local
governments’ poorer and makes the relationship with the public very weak.

Growing challenges as the standard of living rises had troubled the local government because
of limited financial resources. Although they have either a small financial deficit or a surplus,
they constantly face financial limitations that delay meeting the increasing need for better
services (Azmi Setapa and Elayne). Due to the increase in jurisdiction, inflation, urbanization
and population growth cost of providing service has increased. So to overcome this problem
local government should increase their revenue to meet the global challenges and
technological advances since income or revenue collection has not significantly enhanced.

References

1. Phang Siew Nooi, University of Malaya, Decentralisation or Recentralisation?

Trends in Local Government in Malaysia, Commonwealth Journal of Local
Governance Issue 1, May 2008.
2. Laman Web Rasmi Majlis Daerah Rembau, www.mdr.gov.my
3. Laman Web Rasmi Majlis Perbandaran Seremban, www.mpsns.gov.my
4. Laman Web Rasmi Dewan Bandaraya Kuala Lumpur, www.dbkl.gov.my
5. http://en.wikipedia.org/wiki/Local_government#Malaysia
6. http://www.colliers.com.my/statutory/assessment.htm

PROBLEM STATEMENT
Principal Proposition
Three main income sources of local government are rents and fees for services, grants and
subsidies from central or state government and local taxation. Besides the main sources local
government also receive its revenue from miscellaneous of charges and fees such as licence,
payment for various forms of services, rental penalties and compounds. ( Local government
in Asia and Pacific: Malaysia; UN ESCAP)

Interacting Proposition
Although, Local government has many source of resources of income, yet over the years
local governments in Malaysia have increasingly struggled to maintain the viability in
recurrent income with some just barely able to support infrastructure development
programme through revenue surpluses and from loans. (Phang, 1997)
Moreover, measures to increase the local government financial and revenue must be taken
soon otherwise this local authorities will face a continuing pressure on their limited financial
resources in the future. (Phang, 1997)

Speculative Proposition
As for some literature, the mentality of the local government authorities who are very
dependable on federal government grants and state funding causes the local government had
failed to seek their own money. (Phang, 1997)
Besides that, (Azmi Setapa and Elayne) local authorities are also facing financial shortage
caused by new roles and responsibility that burdened the financial system of local
government.

Justifying Function
Local government finance is in a very poor condition. To create a better financial position,
local government must enhance its revenue. By this study, we could find a proper and better
solution in maximizing the revenue of local governments.
RESEARCH OBJECTIVE

The overall study goal is to examine the finance position of Local Government and ways to
enhance the revenue of Local Government.
The specific research questions are:-

1. What are the sources of income of Local Government?

2. What are the problems and implication faced by Local in maximizing its revenue?
3. How to maximize the revenue of Local Government?

The specific research objectives of this study are to:-

1. Analysis the source of income of Local Government

2. Examine the ways to practically overcome the problems
3. Addressing the strategy in maximizing the revenue
SOURCES OF REVENUE IN LOCAL GOVERNMENT

Local government basically has many form of revenue. All the sources of revenue are well
covered by the Local Government Act 1976 (part 5, section 39) for Peninsular Malaysia,
Local Government Ordinance 1961 (section 61) for Sabah and Sarawak is governed by Local
Government Ordinance 1948 (chapter 117, volume 5); The local authority (rating) regulation,
the Kuching Municipal Ordinances 1988 (modification of Cap. 116/1948) and the City of
Kuching North Ordinances 1988.

The local government revenue obtaianed from local sources and its consist of taxes, rates,
rents, fines, user charges, dividends from investments and income from local government
properties (Phang, 1997). Besides that, grants and contributions from state government and
federal government is also a part of Local Governments revenue.

Whereas, Ministry of Local Government had divided local government revenue in to six
group which is, (1) assessment tax, (2) licenses, (3) rentals, (4) government grants, (5)car
parking charges, compounds, fines, and interest and (6) loans. (Azmi Setapa dan Elayne).

The below table shows the sources of local revenue:-

Assessment tax

The assessment tax refers to the property tax collected by the local authorities for the
provision of the services to the residents. The rates of the assessment tax collected are
different from one local government to another. Moreover it also differs in a form of property
rights. Whereas, the type of property categorised to residential, commercial or industrial.For
an example, the assessment tax rate fixed by Majlis Bandaraya Johor Bahru on residential
type of property is 0.13% but at the same time they rate of assessment tax for commercial
type of property is 0.26%. In another hand, Majis Daerah Kulai set its assessment tax rate for
the residential is 0.30% while the rate of commercial type property is 0.45%. (Colliers,
Jordan Lee & Jaafar, Malaysia)

In most states, the amount of assessment tax is calculated based on certain percentage of
annual value of the property. The annual value of a property is the total value of rents if the
property is rented out in the open market. In case of Johor, the calculation is based on the
proportion of improvement in the total value of the property. Usually, assessment tax will be
collected twice a year. Previous studies shows that, more than 60% of total revenue comes
from assessment tax where Petaling Jaya Municipal Council contributes around 66.9%,
Penang Island Municipal Council 62%, Kuala Lumpur City Hall 70.9%, Hulu Langat District
Council and Tawau Municipal Council 65% on their total revenue (Phang, 1997). This shows
that, assessment tax is a most important source of local government.

Licenses

The other form of revenue of local government is the licences. Licences can be categorised as
a non tax revenue. The main purpose of issuing license are to control the establishment,
ownership and activities of business. License is the second major revenue resources of the
local government. Any kind of premise based business such as Restaurants, Hawkers,
Grocery stores need to get their licenses in Local Government. According to a study,
conducted in year 2000, almost 3.8% of total revenue of Petaling Jaya Municipal Council are
contributed by the licenses and permits. Not only in Petaling Jaya, the study also have been
done in Klang Municipal Council, Shah Alam City Council and Ampang Jaya Municipal
Council which contributes 4.9%, 1.9% and 2.9% accordingly to the total revenue.

Rental

Rental is a second form of non tax revenue. Rental is a strong income for the local
governments. Local governments are able to raise rentals during economic booms when
demand for property is high (Azmi Setapa). Local government earns rental from the renting
of its property such as multipurpose hall, stalls, shops, courts and others.

Government Grants

Next source of revenue is grants. Local government receive grants from state government and
also from the federal government. A Local government receives five types of grants. Two of
it is from state government and other three from the federal. State government provides
equalization and development grants while federal provides launching, maintenance and road
grants. State government pays the equalization grant depending on local government financial
position. Meanwhile , the development grants is for the purpose of financing small projects
such as drainage, shop lots, food stalls, mini market and street light. Besides that the federal
or Ministry of Local Government has set a amount of Rm136.1 million as a launching grants
to restructure all local government. At the same time, federal also introduced a maintenance
grant based on size of the community and its revenue, in order to help local governments pay
increase in salaries and wages. States government may divert the state road grant from the
federal government to local governments that have state roads qualified for the grant. But
many town roads under the jurisdiction of local government are not qualified for the grant. In
1993, the federal has introduced the back-lane grant to maintain the local roads that are not
included in the state road grant. (Azmi Setapa)

Car parking charges, Compound, Fines and Interest

Other source of local government revenue is the car parking charges, compound, fines and
interest. Mostly all town areas has this kind of parking charges. This is charge for the parking
area provide by the local authorities. Compound and fines is a charge imposed on residents
who are not following the local government rules and regulation. Fines and compounds
usually charged by local government for offences such as littering, dumping of household
refuse, hawking without a valid license, illegal parking within the local authority area.

Loans
Most of the local authorities rely on loan funds to finance capital projects and some operating
expenditure. The Local Government Act 1976 allows local governments to get loans to
covers some special expenditure with some conditions such as every loans must be approved
by the state authority, total of loans should not be more than five times the value of the
current valuation list of local government and repayment period should not be more than 60
years.