Historic legal battle starts Monday

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High Court to hear challenge by Petronas against Sarawak’s right to impose sales tax on oil and gas in three-day trial

KUCHING: A watershed moment in Sarawak’s history begins tomorrow as the High Court here is set to hear the judicial review application filed by Petroliam Nasional Bhd (Petronas) against the imposition of the state sales tax (SST) by the Sarawak government.

The three-day trial before Justice Azhahari Kamal Ramli is the culmination of more than a year of disagreements between Sarawak, the Federal government and the national oil company over the tax.

The court will decide whether the state can impose the five per cent SST on crude oil, liquefied natural gas and condensates, which are forms of oil residue, produced by Petronas from natural resources extracted from Sarawak.

It will also determine the extent of Sarawak’s rights over its oil and gas resources under the law.

SST introduced 21 years ago

However, the SST is not a newly introduced tax. In 1998, the Sarawak State Legislative Assembly (DUN) passed the State Sales Tax Ordinance 1998 (SST98) using powers conferred by the Article 13B (3) of the Federal Constitution, which covers rights to property.

Since then, the tax has been imposed on palm oil, lottery ticket and tyres.

In 2018, the State Cabinet decided to include petroleum products among the list of goods subject to the SST and this came into effect on January 1, 2019.

It is understood that six oil companies have started paying the SST but Petronas has refused to do so, which led to the filing of the judicial review late last year.

Why won’t Petronas pay SST?

The national oil company believes that certain provisions in the amended SST Ordinance are ultra vires or go against the Federal Constitution and are therefore, null and void.

Petronas argues that the State government has no right or constitutional power to impose SST on petroleum products which is the subject matter under the Federal List in the Ninth Schedule of the Federal Constitution.

A point of contention has also been the Petroleum Development Act 1974 (PDA1974) which had vested Sarawak’s oil and gas in Petronas. The vesting instrument was signed by the then Chief Minister, Tun Abdul Rahman Ya’akub.

What is Sarawak’s stand?

The State government believes that the PDA74 failed to provide adequate compensation for the vesting of ownership of oil and gas in Petronas and is a law that contravenes Article 13 (2) of the Federal Constitution.

The clause says “No law shall provide for the compulsory acquisition or use of property without adequate compensation.”

According to informed sources, under the cash payment agreement dated March 27 1975, the State government had not waived its rights to either requiring Petronas to comply with state laws or to pay additional taxes or levies.

The State government has argued that it was constitutional arrangement agreed upon under the Malaysia Agreement 1963 and the Malaysia Act 1963 that the State has the power, if it so wishes, to pass laws to impose SST.

What’s the impact of the court decision?

The outcome of the three-day trial will have a bearing on the civil suit filed by the State government against Petronas to recover the unpaid SST, which amounts to about RM1.3 billion as of June last year.

The civil suit will be heard before Judicial Commissioner Christopher Chin, who had on Jan 23 dismissed Petronas’ application for his recusal. Petronas is appealing against Chin’s decision.

The outcome of the judicial review will also have a huge impact on the state’s development plans since revenue derived from the SST is a big chunk of the state budget.

On top of that, the state government has put in motion its aim to regulate and develop the oil and gas industry with the belief that it has control over the state’s resources.

Petronas too would be affected, particularly in connection with its dealings with other oil producing states in the country.

Indeed, the decision of the High Court here will have a significant impact on the country and the policies of the Federal government in the years to come.