From streamlining primary healthcare to amplifying agricultural outcomes, digital IDs matter. Here are some of the reasons why and the attendant benefits and risks.

Besides health and agriculture, digital IDs have the potential to optimise service delivery in areas such as education, financial services, social security, gender and equality. And there is more.

Tax authorities increasingly seek to use foundational ID systems – i.e., general-purpose national IDs – for tax purposes, including identifying and authenticating unique taxpayer information. Unlike tax identification numbers (TINs) which are often disconnected from other government databases, foundational ID systems can more nimbly facilitate access to third-party data and have interoperability with other government databases. This could help with audit selection and fraud detection and bolster broader administrative functions to increase revenue.

Despite this potential, there is little research on the actual impact of foundational IDs on tax collection. A core objective of ICTD’s DIGITAX Research Programme is to reduce this evidence gap. To this end, we took part in ID4Africa 2022. The conference theme was Identity in context: The digital transformation journey begins.

What could participants take away from this exciting conference? We found four key points:

1) Whole-of-government coordination and political buy-in

First, political commitment and buy-in are a must for any national identification strategy to succeed. For revenue authorities, a concerted cross-governmental approach ensures tax authorities have a seat at the table and can advocate for an ID system that fits tax administrations’ requirements.

However, in practice, there are lingering concerns about the feasibility of inter-institutional collaboration when government ministries, departments and agencies are fragmented or weak. Public institutions in many African countries are still heavily siloed and saddled with complex internal political dynamics. As a result, national ID systems could be exploited for political purposes, especially in non-democratic systems. Although whole-of-government coordination – including the cohesive data sharing it engenders – is essential for integrating national ID systems with tax registries, the efficiency of that coordination still raises questions about how the technology is used, to whose benefit, and to whose detriment.

2) Legal and regulatory environment: tax use-cases, data security, privacy

Second, participants highlighted the importance of data security and privacy protection, especially where trust in the government is typically low. This becomes even more significant when ID data are shared across the public sector, including for tax administration purposes. In some countries, especially some of the early adopters, the legal or regulatory foundation for privacy protection was an afterthought after systems had already been established. In other countries, and partly based on lessons from these early adopters, ID systems adhere broadly to privacy-by-design principles.

Tax authorities are unlikely to have the mandate to devise regulatory or legislative standards for ‘good’ identification systems. However, as stakeholders of ID agencies, they must be cognisant of potential risks that may arise from integrating tax registries with ID databases. Nigeria and India provide illustrative insights.

In Nigeria, the Federal Inland Revenue Service (FIRS) and the Joint Tax Board (JTB) collaborate closely with the National Identity Management Commission (NIMC), the country’s national ID agency. Such is the extent of their collaboration that FIRS, with NIMC’s endorsement, has proposed legislative amendments to clarify the terms of data exchange between agencies accessing ID data for fiscal purposes.

Aadhaar, India’s national identification system, illustrates the privacy risks of ID data sharing. Since its introduction in the early 2010s, Aadhaar has transformed identification services and public service delivery. It is the most extensive such programme globally, with biometric and demographic information on over one billion residents. However, it has also suffered several privacy and security breaches and various legal challenges, particularly regarding privacy, security, and the exclusion of vulnerable people. Though Aadhaar continues to be used for multiple tax functions, including the verification of income tax returns, the country’s Supreme Court has curtailed other use-cases, including KYC [know your customer] authentication and SIM registration.

3) Would ID integration entrench or resolve existing inequities of access?

Third, despite the many possible benefits of linking foundational ID systems and data to tax registries, there are notable limitations in using foundational IDs that may result in efficiency gaps. This can inadvertently entrench the marginalisation of vulnerable groups.

Many still struggle to obtain IDs, given the difficulty of registration, direct and indirect costs, and lack of supporting documentation. Women, the poor, the elderly, people living in rural areas, and people with disabilities are disproportionately affected.

4) Interoperability and technical coordination for data integration

Fourth: Good data governance can only be achieved through a multi-stakeholder process, a long-term vision, a clear legal framework, and mutual cross-system compatibility. And good data governance is the foundation for the interoperability that would enable tax administrators to access foundational ID data in real-time and integrate taxation effectively with national ID databases.

Interoperability is also elusive because of system designs and technology choices. Government representatives at the conference often stressed the importance of systems not being technology- or vendor-locked. The Philippines’ experience with MOSIP, an open-source solution, has been successful, enabling registration, identity management, and authentication, thanks to different functional units communicating and transferring data.

This contrasts with Uganda’s vendor-locked ID system, which has hampered scalability and interoperability. As a result, Uganda is now considering adopting MOSIP or other open-source frameworks.

Implications for research on digital IDs and tax

Building on these insights, we want to answer three big questions:

  • Implementation:
    • How do countries’ political economy, regulatory frameworks, and institutional dynamics shape the integration of digital IDs with tax administration?
  • Effect on tax administration:
    • How does integration improve revenue authorities’ core functions and performance, as well as the equity and progressivity of tax systems?
    • How does integrating tax registries with foundational ID systems improve identifying and monitoring specific hard-to-tax taxpayer categories, such as the wealthy?
  • Taxpayers’ experiences:
    • How might a digital ID system improve taxpayers’ journey from registration to assessment?
    • How does integration address taxpayers’ practical compliance constraints, and how are taxpayers responding in cases where integration has been achieved?

And we are already contributing. In an ongoing study in Uganda, we are evaluating the impact of integrating the national ID database into the Uganda Revenue Authority’s (URA) e-tax platform at the point of registration. This is part of a broader set of sharing arrangements between the URA and other government institutions.

 

Additional recommended reading: Tax obsessions: Taxpayer registration and the informal sector in sub-Saharan Africa

Acknowledgement: This news post was edited by Njeri Okono.

Moyo Arewa

Moyo is the Programme Director for the Local Government Revenue Initiative (LoGRI). He was previously the Manager for Strategic Initiatives at (ICTD) and, before then, a Policy Development Officer at the City of Toronto. His tax research has focused on understanding how new technologies impact tax policy, administration, and public service delivery.

Fabrizio Santoro

Fabrizio is a Postdoctoral Fellow at the Institute of Development Studies, and the Research Lead for the second component of the ICTD's DIGITAX Research Programme. His main research interests relate to governance, public finance, and taxation, with a strong focus on impact evaluation methodologies and statistical analysis. He holds a PhD in Economics from the University of Sussex.

Celeste Scarpini

Celeste Scarpini is a Research Officer at the ICTD. Her research interest are labour market policies, taxation, and instruments of social insurance, social assistance, and financial inclusion in developing countries.