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  1. If you are in India, tomorrow is the last day for filing your income tax returns. For nearly a decade, I have done the same thing every year. At the beginning of the year, I tell myself I’ll finish it nice and early. Then, I think about the income tax portal and develop a stomach ache. So I procrastinate for weeks until I work myself up to a state of panic. Finally, at the last minute, I do my annual ritual. I visit the Cleartax website, and thanks to its exceptional user-experience—a mixture of positive reinforcement, soothing microcopy, and amazing communication—I file my taxes. I love Cleartax. They just know how to make a painful process feel joyous. Every year, I finish filing my taxes on Cleartax and I tell myself, I can’t believe this website is free. Well. Not anymore. Fintech company Clear (erstwhile Cleartax) has started charging for its income tax return (ITR) self-filing feature beginning [the] current assessment year. The company, which started in 2011 with self-ITR filing as the first product offering, had been providing the facility free of cost. “This incredible product has been available free of cost to all our users for 10+ years. In order to continue supporting our users with this amazing product, starting May 2022, we are charging our users a nominal fee that would help us sustainably process data of millions of Indians all while ensuring 0% downtime," read a note on Clear’s website. Fintech firm Clear starts charging for ITR filing after 10 years of free service | Mint To be clear (heh!), I'm not outraged about this. If anything, I’m surprised it took them this long to charge for what many consider a pretty solid service. If you look at tax filing, Clear is the market leader in India, at least among individuals. Every year, like clockwork, ‘Neha from Cleartax’ lands up in our email inboxes. And millions of Indians like me fall for her charms, and use Clear’s sleek, sexy website to file our taxes. Many websites offer a self-serve tax-filing service. But Cleartax is the biggest among all of them (with the exception of the government’s income tax portal itself, of course). So when India’s largest private tax-filing website asks all of its users to pay up to use their website, after a decade of doing it for free, it feels pretty significant. The crazy part is that nobody else seems to have noticed this. In fact, that Livemint article I shared above is the only news report I could find about this development. And nobody seems to be wondering why Clear is suddenly doing this. What did it finally see after a decade? I think Clear has discovered the three limits that a lot of internet and software companies are seeing in India. I have written about this several times before, but more than any other company, the clearest evidence about what is happening is coming from… Clear. Let’s dive in. Clear and the three limits of India's internet companies Let’s begin, like all good stories do, with a controversy. In February 2020, just before the pandemic hit India, India’s Prime Minister Narendra Modi attended an event called the Times Now summit. He made a speech. In it, Modi spoke at length about his vision to make India into a US$5 trillion economy. The details were sketchy. There was a laundry list of the achievements, most of which had nothing to do with the economy. Then, Modi went into something specific. According to him, this was a big problem which needed to be fixed, and he was asking fellow Indians to help fix it. Tax evasion. Specifically, income taxes. And then, he casually threw in an astonishing statistic. However, Modi lamented that when a number of people did not pay tax and found ways to evade it, "the burden falls on those who honestly pay their dues". He said it was unbelievable but true that only 2,200 people in the country had declared earnings of Rs one crore per annum. "In the last five years, more than 1.5 crore cars have been sold in the country. Over three crore Indians went abroad for work or travel. But the situation is that only one-and-a-half crore people in our country of more than 130 crore pay income tax," Modi said. Pay taxes for India's development; tax harassment will be thing of past: PM Modi, Moneycontrol On the face of it, the 2,200 number makes absolutely no sense. There are probably more people who live and work at Outer Ring Road in Bengaluru who make that much, if not more. Some brave souls noticed this error in the Prime Minister’s speech and wrote about it. A few news media outlets also picked it up. Finally, the Income Tax Department was forced to issue a clarification. In a series of tweets, it broke down the number of income tax payers in India, by tax slabs, all to set the record straight. After reading the tweets, many claimed victory and said that Modi was, in fact, correct. Others pointed out that the tweets said the exact opposite thing and that he had made a gaffe. Then, Modi probably did something else the next day, and everyone jumped to the next controversy. Finally, a couple of weeks later, the pandemic hit, India went into lockdown, and everyone forgot about income tax evasion. However, this entire saga revealed something really important. For the first time, we got a breakdown of India’s income tax payers. Remember, these statistics are officially issued by the income tax department. This is not a guesstimate. It’s public. Here’s what the IT department said: Around 57.8 million Indians filed an income tax return for the financial year ending in 2019. If you look at annual income declared by them, it breaks down like this: 10.3 million declared an income of less than Rs. 2.5 lakh 32.9 million declared an income between Rs. 2.5 lakh - Rs. 5 lakh 10 million declared an income of between Rs. 5 lakh - Rs. 10 lakh 4.6 million declared an income of greater than 10 lakh If you took these ~60 million Indians and represented their income as a pyramid, with the lowest income below and the top earning ones at the top, you’ll find that it closely resembles something long-time readers of The Nutgraf are familiar with. Remember that the pyramid on the left is from 2019, and the one on the right is a 2021 estimate. I suspect the taxpayer pyramid is practically identical to the online shopper one today. Anyway, my point is that the pyramids look similar because they are related to each other. People who buy things online need to have money to do it, and the distribution of their wealth is directly proportional to the amount they spend buying things on the internet. Things like food deliveries, ride-sharing, e-commerce. And tax filing services. Clear is an interesting company. It’s one of those rare startups that hasn’t exactly exploded, but has still maintained a position of being the next big thing for a while now. Quite recently, it became one of the first few companies in India to raise funding from Stripe—who know a thing or two about online payments. Clear has a good product, backed by a formidable SEO engine. Go to Google and search for anything on income tax in India, and chances are you’ll end up on the Cleartax website. This must’ve taken a lot of work. They picked the right growth engine, because it clearly works. The company claims that Clear is used by over 6 million individuals, 1 million+ small and medium-sized businesses, and 30,000+ enterprises. According to a couple of people I spoke to who work in the same industry as Clear, these numbers seem to be on the higher side. So I’m guessing this is probably lifetime users and not active users. But still, it’s mighty impressive. The revenue side is another story, though. The last time Clear reported its numbers was in 2020, when it declared a revenue of Rs 60 crore (~US$7.6 million). The company indicated that it recorded a 100% year-on-year growth last year, so let’s take them at their word, and assume that it’s making somewhere around Rs 120 crore annually. That’s somewhere in the neighborhood of $15 million. I mean, that’s not a lot of money. But let me be clear (dammit). This isn’t Clear’s fault. If you had to list out Clear’s business strategy, it would look something like this: Build a beautiful tax-filing website. Make it a free product. Let’s call it Cleartax. Attract millions of users. Collect data about their income and spending. Find out who makes how much, and what they do. Keep the product free, and add some upselling for paid services like Chartered Accountants, etc. Use these millions of users as a funnel to cross-sell a paid product. Now that we know how much tax they pay, we can tell them that we can help them save tax and with mutual fund investments. Collect a fee for the service. Let’s call the product Black by Cleartax. Finally, create a separate product targeting businesses, SMEs, and enterprises. Help them with things like GST filings at the corporate level. Make most of it self-serve, like a SaaS product, and collect some managed-serve customers. Charge a fee for this, and make money. Look at that strategy again. Just look at the three revenue channels for Clear. If you’ve been reading this newsletter, you probably know where I’m going with this. We’ve been talking about it for a while now over several editions. Clear’s strategy led to it discovering the three limits that all internet companies in India encounter. First, Clear has a free consumer product with a paid tier. It expected to get millions of users, and to convince a big chunk of them to pay for additional services. Limit 1 : The number of paying internet users in India is much smaller than we think. Essentially, I did a numerical breakdown of India’s internet consumers and came to the conclusion that if you want to make money in India as an online business, your market size, at the outer limit, is somewhere around 70 million users. I described how these users form a pyramid, with 40 million entry-level shoppers who almost never buy anything online at the base, and 10 million users, which I called India’s California users, at the very top. My argument was that a bulk of the purchasing power rested on these 10 million users, and once an internet company captured them, going down to the next level was significantly more difficult. Anyway, back then, a lot of people disagreed with me. It’s important to remember that July 2021 was a different time. Companies were going public every month. Unicorns were anointed before breakfast everyday. I even went on television to make my arguments, and the general response I got was that I was being quite pessimistic. However, of late, I’m seeing more and more people come around to the idea of this limit. Nithin Kamath, CEO of Zerodha, wrote a viral thread on Twitter about the number of paying users in India’s internet market. His estimate is higher than mine, but the central argument is essentially the same—if you are an internet company, the market is much smaller than it appears. Amazon and Flipkart go back to go forward, The Nutgraf Second, Clear expected to make revenue from cross-selling financial products to its original base. Well… Enter Limit 2 : Cross-selling is a chasm in India. For years and years, nearly every internet business, from e-commerce to edtech to food-delivery to ride-sharing to fintech, believed that the solution to all their problems was… cross-selling. Go back and you’ll find that word in all their pitch decks, strategy documents, media interviews, and even in their IPO filings. Even today, most companies, irrespective of sector, believe that cross-selling is their answer to life, the universe, and everything. The conventional wisdom was—go big and get users, cross-sell stuff, and win the game. However, over the last few months, companies are finding out that cross-selling isn’t as easy as it looks. As they attempt what they believed was a small hop, they are discovering that it’s actually a wide chasm. Many are making the leap and are suddenly finding out that the ground has disappeared beneath their feet. The cross-selling chasm didn’t appear out of nowhere. It was always there. It’s just that most companies didn’t know it existed. Something that was invisible is now being discovered. How Flipkart crossed the secret e-commerce chasm, The Nutgraf And finally, there’s revenue from enterprise software sales. Limit 3 : Businesses don’t pay for software There’s a general theory in software and the internet that once you lock-in the users, the money will follow. Acquire now. Engage well. Monetise later. Every growth strategy teaches you this. Many successful companies have been successfully built on this theory, from Snapchat to Facebook. Among modern consumer internet companies, it’s not a theory. It’s a law as immutable as gravity. There’s a variant of this, for enterprise SaaS, that suggests that if you make your product so compelling that it’s able to create an ecosystem, where everyone all across the value chain uses your product, trains others on it, and hires for it, it practically becomes the standard for everyone, and then you make tons and tons of money. Look at IBM, and after that, Microsoft. And SAP. And Salesforce. The list goes on and on. Again, it’s like gravity. It just works. Tally shows us that you can do all of the above, and you still can’t make money. Gravity in India works differently. Nobody wants to buy software in India, The Nutgraf On paper, Cleartax had a smart strategy. Nobody could fault it. It did exactly what most companies did, and all of its assumptions were more or less seen as conventional wisdom in India. But now that companies are discovering these three limits in India, they are forced to do things to circumvent them. As I’ve written before, Flipkart is doing it by changing its org structure. Intuit is doing it by shutting down Quickbooks in India. Nykaa, Licious et al are doing it by creating vertical-focused companies. Clear has to figure out ways to circumvent these limits too. To start with, it’s focussing on international expansion as a way to get around the third limit. If nobody is going to pay for software in India, well, maybe the answer is to sell software elsewhere. This is essentially how Freshworks and Zoho succeeded. On the consumer side, Clear has decided that if the size of the market of paying users in India is tiny, then it won’t bother trying to get to millions and millions of users. Why create a big, wide funnel if most of the users who fall through it will never, ever pay for Clear? Why build a product for the free-riders? The first limit tells us that after a certain point, free user acquisition becomes a liability. Maybe it’s better to cut them off and try to capture revenue from the high-value users. These are the users who have money. They are on the top end of the pyramid. And these users are likely already using Clear for free. I mean, why bother trying to expand the pie, right? And that’s why Cleartax isn’t free anymore.
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