Digital identification could be a silver bullet to increase tax revenues for ASEAN governments while pulling the region’s poorest out of poverty by redistributing wealth.
The adoption and usage of digital identification (‘digital ID’) could promote inclusive economic growth in ASEAN while the region continues to deal with the pandemic. Using digital ID – authenticating an individual’s legal identity (such as for national identity cards, passports, and birth certificates) over digital channels – allows people to access public and private services remotely and to sign legal documents with the same validity as if they were signed in person. Eight of the 10 ASEAN members – Brunei, Cambodia, Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam – have begun or plan to implement digital ID programmes.
Digital ID has the potential to increase inclusive growth in ASEAN in two ways. First, it should improve the operational efficiency of national social protection systems. Social assistance measures such as large-scale cash and in-kind transfers to compensate for income losses and to sustain livelihoods are increasingly needed to mitigate the negative impacts of the pandemic and high inflation. Efforts to achieve fully inclusive growth have been reversed as the decline in workers’ incomes, and job losses increased the poverty rate within ASEAN. The ADB estimated that those living in poverty in ASEAN countries increased by 5.4 million in 2020 and 4.7 million in 2021. The ongoing surge in food and energy prices has reduced the purchasing power of consumers, especially those in low-income households and net food buyers. All this can worsen poverty in the region.
Encouraging informal workers and entrepreneurs to adopt digital ID and to register their businesses should boost regional tax revenues and increase the efficiency of tax collection through digital tax filing.
Countries using digital ID can better target low-income households and provide them with easier and timely access to social benefits such as cash transfers and social insurance. Digital ID contains personal information, including one’s legal name, gender, address, and photograph, and can also reveal a person’s income and employment status. Government agencies can thus use this information to easily transfer cash to targeted households, to ensure they reach the poor. Banks can harness digital ID for online account and other banking applications and grant almost instant approvals. Government agencies can also directly transfer cash to beneficiaries’ bank accounts using online channels. This should save time and costs for cash providers and beneficiaries.
Second, digital ID should increase tax revenues, which will strengthen fiscal sustainability. The fiscal balance (i.e., public revenue less public expenditure) in all ASEAN countries has deteriorated since 2020 due to the use of fiscal stimulus packages or reduction of taxes. For example, the fiscal deficit in Indonesia in 2020 doubled from its pre-pandemic level, rising from -2.23 per cent of GDP in 2019 to -5.87 per cent in 2020. Thailand’s fiscal deficit rose by more than four times from -0.82 per cent to -4.70 per cent in the same period. If ASEAN governments spend more on subsidies, which is possible given the lack of a clear end to the pandemic and the ongoing war in Ukraine, their fiscal balance will deteriorate further. The potential insufficiency of regional governments’ financial resources to support social assistance measures will be an indicator to watch.
One way to raise tax revenues is by expanding the tax base by shifting workers and firms in informal sectors of the economy to formal ones. The share of informal employment – workers employed in unregistered firms – in ASEAN’s developing economies remains high, ranging from 30.9 per cent in Brunei to 64.4 per cent in Thailand. Among the highest shares are in Indonesia (80.4%), Laos (82.9%), and Cambodia (93.6%). These unregistered firms are concentrated in three sectors: accommodation and food services, wholesale and retail trade, and construction. Their workers are more likely to be poor because they lack formal education or qualifications and typically would not have signed employment contracts. Unregistered firms are likely to evade or underpay taxes and social contributions and fail to meet industry standards and licensing requirements. This creates unfair competition with registered firms and contributes to the loss of government tax revenue.
Encouraging informal workers and entrepreneurs to adopt digital ID and register their businesses should boost regional tax revenues and increase the efficiency of tax collection through digital tax filing. In Singapore, for example, businesses can electronically file their corporate taxes, while individuals can also electronically file their income taxes. For the workers, using digital ID will expedite their access to national protection schemes that were previously inaccessible when they were in the informal sector. Entrepreneurs can benefit from digital transaction records to prove their creditworthiness to banks.
In the short run, additional tax revenues would come from levying corporate taxes on firms that were previously unregistered and thus avoided paying taxes. Additional revenues from personal income taxes are likely to be limited, however, as most informal workers’ salaries will be below the threshold for taxation. In the long run, however, tax revenues from both buckets should increase as firms grow and workers’ salaries increase.
Widespread adoption and usage of digital ID could foster the redistribution of wealth in ASEAN, mainly through social protection and taxes. A key step in the process is for ASEAN governments to streamline and digitise their regulatory procedures, while strengthening data safeguarding measures. As the entire region will benefit from the promotion of digital ID usage, there is no time like the present to start serious efforts on these fronts.
Sithanonxay Suvannaphakdy is Lead Researcher (Economic Affairs) at the ASEAN Studies Centre, ISEAS – Yusof Ishak Institute.