Fayda, Ethiopia’s new digital identification (ID) system, comes with big potential for the country’s tax administrations, which lose significant amounts of revenue because of tax evasion and fraud. But it should not be considered a silver bullet for the problems of the Ministry of Revenue and other institutions.
Since December 2023, taxpayer registration in Ethiopia has been integrated with Fayda, the country’s national digital ID system.
Fayda (ፋይዳ) is an Amharic term referring to ‘value’ or ‘importance’. The National ID Programme, which was established by law (Proc. 1284/2023) under the Prime Minister’s Office, is mandated to issue a unique 12-digit Fayda number for all eligible residents.
While Ethiopia’s economy grows and changes its structure, both federal and regional tax administrations have been losing significant amounts of revenue because of tax evasion, rampant fake receipts, and fraud.
How could Fayda address these and other challenges?
Fayda lies at the heart of Ethiopia’s digital transformation
Ethiopia is aggressively moving towards digital transformation of government services. The Digital Ethiopia 2025 strategy envisages harnessing the potential of technology to drive inclusive economic growth and more efficient institutions.
The Fayda system lies at the heart of this strategy. It aims to digitally record the identity of every Ethiopian resident and to use more accurate ID information across various government systems.
Five potential benefits of integrating Fayda with the tax administration systems
Recent analysis by ICTD’s DIGITAX Research Programme on the integration of digital ID systems with tax administration systems, in Uganda and Ghana, shows positive results in expanding the tax base, increasing inclusivity, reducing the compliance burden of taxpayers, and simplifying internal processes.
Integrating Fayda with Ethiopia’s tax administration systems could bring several benefits.
- Better quality tax data
Tax registries are often inaccurate and identifying taxpayers poses challenges. Fayda would provide more accurate and detailed information on each taxpayer’s identity through their unique verified Fayda number – information such as their name, contact details, and location – eliminating reliance on self-reports and minimising manual input.
- Better taxpayer experience
Relying on the unique Fayda number to navigate the tax system would streamline the taxpayer registration process and reduce the administrative burden for taxpayers.
- Broader tax base
As the Fayda system becomes more accepted and integrated with a variety of service providers, tax administrations could leverage this to detect non-registered taxpayers. With inter-institutional cooperation and data-sharing agreements, they could easily track economic transactions and property ownership records and accurately estimate a person’s tax .
In this sense, the Fayda number becomes the crucial piece of information to enable easier cross-checking.
- Stronger monitoring and enforcement
The availability of higher-quality digitised data (from points 1–3) could strengthen tax monitoring and enforcement functions. The unambiguous identification of taxpayers through integration with Fayda could assist the tax administration in enforcing compliance on tax evaders.
- Better governance and management
High-quality data from Fayda could facilitate a shift in the revenue authority towards a more data-centric model, enabling improved performance targeting, forecasting, and statistical analysis.
Fayda-based taxpayer registrations
Since December 2023, when tax registration was integrated with Fayda, each new taxpayer identification number (TIN) created is unambiguously connected to a Fayda number. Therefore, a Fayda number has implicitly become a prerequisite for getting a TIN.
For TINs already in the tax system, the goal is to map them to their corresponding Fayda number.
Interestingly, the Ministry of Revenue was already using biometric data for TIN registration, and the government is using those TINs for several public services. TINs have been relatively reliable as identifiers.
Why, then, a policy change? On the one hand, with TIN coverage somewhat patchy, the government wanted to leverage the rapid expansion of Fayda to boost taxpayer registrations. On the other hand, the biometric registration system for TINs was already quite expensive to maintain and update, and the Ministry of Revenue could now get biometrics from the Fayda system, which is partially financed by external funders.
Fayda’s persistent challenges
Awareness, accessibility and administrative constraints are critical challenges to the success of Fayda.
Awareness
Misconceptions about Fayda and mistrust of the system could curb wider adoption. With fewer people registering for Fayda, the benefit to federal and regional tax administrations would be reduced.
The government should improve people’s understanding of Fayda, and prioritise data privacy and confidentiality, thus building trust into the system. Intense information campaigns and multi-stakeholder collaboration could help reach this goal.
Accessibility
Registration for Fayda seems a simple process. However, as long as it remains inaccessible at the lowest administrative level (that of the kebele) across all regions, millions of residents will remain out of the system for the foreseeable future. As with the challenge of awareness, partial take-up could severely limit the potential of Fayda to strengthen tax administrations.
The government could help push Fayda registration to the last mile using bank branches, police stations, schools, health facilities, property and land registration offices, or vital event registration agencies. Yet, massive and decentralised registration drives require tremendous resources in terms of equipment and personnel.
Administrative constraints
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.
Further, it is unclear how dormant taxpayers – often present in large numbers in a tax administration’s system – will be treated. This could be expedited by enforcing harmonisation along tax service requests. For instance, a tax clearance request could be processed only if the TIN is mapped to a Fayda number.
Finally, the system integration still allows for duplicates because the biometrics of new Fayda-based registrations are not checked against the biometrics of existing taxpayers. Until the harmonisation and mapping are completed, this could create a loophole that intentionally non-compliant taxpayers could exploit to register multiple times and avoid taxes.
Leveraging Fayda data: beyond tax registration
Fayda comes with big potential but should not be considered a silver bullet for the problems of the Ministry of Revenue and other institutions. Its effectiveness hinges on the availability of other supportive public-good infrastructures, strong multi-stakeholder partnerships, and citizens’ awareness and trust in the system.
Also, while Fayda-based tax registrations could boost formalisation, 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, as individuals could be easily profiled and their information misused.