Fayda, Ethiopia’s new digital identification (ID) system, holds significant potential for the country’s tax administrations, which have been grappling with substantial revenue losses due to tax evasion and fraud. However, it is not a remedy for all the challenges faced by the Ministry of Revenue and other institutions.
Ethiopia is among the last countries globally to launch a national-scale foundational ID system with digital capabilities. Many Ethiopians lack current identification forms, such as local government-issued IDs and birth certificates, hindering their participation in the formal economy’s basic activities.
5 Key Takeaways
1. Potential for Tax Administration: Fayda offers a significant opportunity for Ethiopia’s tax administrations to address revenue losses due to tax evasion and fraud by providing a more accurate and detailed taxpayer identity system.
2. National Digital Transformation: As a central element of Ethiopia’s digital transformation strategy, Fayda aims to provide all residents with access to essential services and economic opportunities, thereby enhancing the digital economy.
3. Benefits of Integration: The integration of Fayda with tax administration systems is expected to improve tax data quality, enhance taxpayer experience, expand the tax base, and strengthen monitoring and enforcement.
4. Challenges and Risks: Despite its advantages, Fayda faces challenges such as public awareness, accessibility, and potential misuse of personal data, especially in a country with a history of ethnic conflicts.
5. Not a Complete Solution: While Fayda holds promise, it is not a panacea for all the issues faced by the Ministry of Revenue and other institutions. Its success will depend on the development of supportive infrastructures, partnerships, and the trust of the citizens.
What is Fayda?
The National ID Programme, established under the Prime Minister’s Office (Proc. 1284/2023), issues Fayda, a unique 12-digit number that signifies ‘value’ or ‘importance’, to all eligible residents. Since December 2023, the national digital ID system, Fayda, has integrated taxpayer registration in Ethiopia. The system unambiguously connects each new taxpayer identification number (TIN) created to a corresponding Fayda number. For existing TINs, the goal is to map them to their corresponding Fayda number.
The new digital id system will support the rollout of voluntary registration and ID issuance across the country, the development of secure and energy-efficient ICT infrastructure, the establishment of a Personal Data Protection Commission, and the digital transformation of public and private sector services that integrate with Fayda. The system will also invest in developing other digital public infrastructure for service delivery, such as data exchange and digital payments.
World Bank support to Ethiopia’s Digital ID System
The World Bank Board has approved the Digital ID for Inclusion and Services Project, providing at least 90 million Ethiopians, including refugees and migrants, with an inclusive and secure ID. This initiative enhances their access to services and economic opportunities.
The project is financed with $350 million from the International Development Association (IDA), including a $50 million grant through the IDA Window for Host Community and Refugees.
The Role of Fayda in Ethiopia’s Digital Transformation
As Ethiopia’s economy evolves, tax evasion, counterfeit receipts, and fraud have led to significant revenue losses for both federal and regional tax administrations. Fayda, central to Ethiopia’s aggressive digital transformation strategy, aims to digitally record the identity of every resident, providing them access to financial services, social protection, jobs, healthcare, and education for all citizens, migrants, and refugees.
It empowers individuals with greater control over their personal data, reduces leakages and fraud in government programs, and strengthens trust in online transactions, thereby boosting Ethiopia’s digital economy.
Fayda Digital ID Benefits
Integrating Fayda with Ethiopia’s tax administration systems could yield several benefits, as evidenced by positive results from similar integrations in Uganda and Ghana.
Improved Tax Data Quality: Fayda could provide more accurate and detailed taxpayer identity information, eliminating reliance on self-reports and minimizing manual input.
Enhanced Taxpayer Experience: The unique Fayda number could make the taxpayer registration process more effective and reduce administrative burdens.
Expanded Tax Base: As Fayda becomes more widely accepted and integrated with various service providers, tax administrations could leverage it to detect non-registered taxpayers.
Strengthened Monitoring and Enforcement: High-quality digitized data could enhance tax monitoring and enforcement functions, aiding the tax administration in enforcing compliance on tax evaders.
Improved Governance and Management: High-quality data from Fayda could facilitate a shift towards a more data-centric model in the revenue authority, enabling improved performance targeting, forecasting, and statistical analysis.
Challenges Facing Fayda
Despite its potential, Fayda faces several challenges, including awareness, accessibility, and administrative constraints.
Misconceptions about Fayda and mistrust of the system could curb wider adoption. The government should prioritize data privacy and confidentiality to build trust in the system. While registration for Fayda seems simple, it remains inaccessible at the lowest administrative level across all regions, potentially limiting its effectiveness in strengthening tax administrations.
Activists and rights experts caution that the misuse of vast amounts of personal data is a possibility in a country with a history of ethnic conflicts. They contend that the potential risks surpass the benefits a digital ID system promises. Jerusalem Girmay, chief communications officer at rights group Omna Tigray, raises strong concerns about the potential for ethnic profiling through disproportionate arrests and surveillance.
Ultimately, for the Ministry of Revenue, migrating all previously registered taxpayers to the Fayda system and connecting their TINs with their Fayda numbers is a daunting task.
Ethiopia’s Digital ID – Not a Silver Bullet
In conclusion, although Fayda carries considerable potential, we should not consider it an all-encompassing solution for the difficulties that the Ministry of Revenue and other institutions encounter. Its effectiveness depends on the availability of other supportive public-good infrastructures, strong multi-stakeholder partnerships, and citizens’ awareness and trust in the system.
The Ministry of Revenue should focus on how to strategically use the new Fayda ID data for core functions beyond tax registration. Strong data protection regulations should also be created to prevent misuse of individuals’ information.
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