e-filing in India: Big numbers don’t show the challenges

e-filing of taxes has seen significant growth over the past few years (136% YoY for salaried professionals) making it one of those apparently lucrative internet spaces with a clear revenue model and steady growth year-on-year riding offline regulatory changes. However, the numbers don’t reveal the challenges that still remain in the Indian e-filing space which need to be addressed for players to really win in this space.

1.       Seasonality of revenues: The first thing that strikes one about the e-filing business is the seasonality of the business model, the fact that tax filing will invariably experience a spurt during a particular time of the year. If e-filing is just one of the many businesses that a company is into, then this shouldn’t hurt too much but if this is the only business that a startup does, then it clearly needs to look out for a sustainable model to make money during the rest of the year.

2.       Cost rationalization for computing hardware: While seasonality of revenues is an important factor, there is another challenge very particular to the tax business. All e-filing sites see a sudden spurt of usage towards the end of the filing season. The last few days of the filing season see astronomical growth day-on-day in the number of filings and the last day invariably witnesses the most number of taxes filed. The huge spurt in traffic and activity towards the end of the filing season requires a lot of computing and processing hardware. However, this hardware is hardly used during the rest of the year when traffic is either stable or low. When one invest in all the hardware, what does one do with it during the rest of the year?

3.       Is this a consumer business? The answer must seem obvious. Of course it’s a consumer business. Consumers use the product and consumers pay for it. The reality though is that this is a business where the bulk of the customers currently are coming through on account of enterprise deals. Tax filing services strike deals with employers and pass incentives to the respective employees to use their services. For most startups, less than 5% of their customer base files taxes directly through them. The rest of the base is acquired by the employer channel. The problem with the employer channel is that it is very difficult to scale it and there is no way it will ever see the organic growth that a direct-to-consumer business will. This might be a great channel to get your first couple of hundred thousand users but how does one make it a sustainable growth story beyond that?

4.       Trust: In a country like India, trust continues to be an important factor and people are more comfortable taking the extra pains to file taxes offline where they can actually meet a tax consultant. An online brand needs to build trust to really penetrate the market and that trust can never be built by a series of campaigns in the tax filing season. A presence needs to be created in the consumers’ mind all year round and, if possible; the company needs to establish itself as a champion of consumer financial needs by offering other financial services rather than just a tax-filing service.

This is not to say that players will not make good money in the meantime. For a 5-10 member team running a tax website, a million dollars of revenue is good money. However, to make a business that can really scale organically, capture the fancy of investors and create an impact in a crowded market of players, one needs to address these challenges successfully.