Senior tax lawyer S Saravana Kumar sees it as a boost for the state’s finances but tax consultant Veerinderjeet Singh is concerned that it may send the wrong message to businesses.

Chow told the Penang state assembly recently that the state government might consider emulating Sarawak by imposing a sales tax on petroleum products.

His statement came in response to reports that national oil corporation Petronas is mapping the hydrocarbon potential in the Langkasuka Basin, which covers the waters of Perlis, Kedah and Penang.

He said that despite its growth and prosperity, Penang remains financially constrained and the state government has to rely heavily on land-related taxes.

Saravana said the sales tax would empower the state government. “It will be able to generate revenue locally and that will enable the Penang government to better manage its expenditure,” he told FMT Business.

He described it as a progressive move that is aligned with the need for fiscal decentralisation in the country.

“It is time for the country to implement fiscal decentralisation like other nations such as Germany, India and Australia where it has been successfully done,” he said.

“We must be able to consider progressive ways of governance. As we grow to be a mature democracy we have to accept all these progressive ideas,” he added.

Nonetheless, Saravana warned that while there are potential benefits, there would be challenges for the business community in Penang.

He said that by imposing its own sales tax, Penang would be ushering in a double taxation system given that the federal government imposes the same taxes.

“Businesses should not be required to pay taxes at both state and federal levels,” he added.

Expressing the same concern over double taxation, Veerinderjeet said it could have an adverse side effect on the Penang economy.

“Imposing sales tax at both the federal and state levels sends the wrong message to businesses given that it would raise costs for them and inflation will go up,” he told FMT Business.

Saravana said that for the northern states to start imposing a sales tax on petroleum or other products, the Federal Constitution would have to be amended to make way for the change.

“It’s not impossible, it can be done,” he said.

Under the constitution, only Sabah and Sarawak currently have the right to impose their own taxes. In the peninsula, taxes come under the jurisdiction of the federal government.

Saravana said the state assemblies could collectively move a motion for constitutional amendments with emphasis on the integral roles of the state and federal authorities.

“If all the states pass the same motion, the federal government must at least listen to them given that the federation cannot exist without the states,” he added.