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Business News/ Markets / Stock Markets/  28% GST rate on online gaming impact: Why Nazara Tech shares fall is limited while Delta Corp stock drop nearly 30%?
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28% GST rate on online gaming impact: Why Nazara Tech shares fall is limited while Delta Corp stock drop nearly 30%?

The 28% GST rate on online gaming stocks caused a bearish reaction, with Nazara Technologies and Delta Corp shares falling rapidly. Nazara expects minimal impact as the tax, while Delta Corp has not commented on the impact on its business.

The 28% tax rate is seen as a setback for Indian players and could lead to players needing to contribute more towards prize money.Premium
The 28% tax rate is seen as a setback for Indian players and could lead to players needing to contribute more towards prize money.

The 28% GST rate imposed on the full value of online gaming stole the limelight after the 50th GST Council meeting. On the expected lines, online gaming stocks reacted on a bearish note on Wednesday. Experts believe the 28% tax rate is a setback for Indian players. Interestingly, Rekha Jhunjhunwala-backed Nazara Technologies' share price fall is limited, on the other, Delta Corp stock is bleeding to drop by nearly 30%.

At the time of writing, Nazara Tech's share price traded at 680.50 apiece, down by 26 or 3.68% on NSE. In the early deals, Nazara's stock did tumble by at least 100.25 or 14.2% by hitting an intraday low of 606.25 apiece. That being said, Nazara's stock has recovered major losses that were recorded in the early trade of Wednesday.

But that was not the case with Delta Corp. The Mumbai-based company's stock traded erased the 200 mark and was trading at 191.40 apiece, slipping by 55.30 or 22.42%. Overall, in the day, the stock dipped by 28.80% with an intraday low of 175.65 apiece.

On Tuesday, in the 50th meeting, Finance Minister Nirmala Sitharaman-chaired GST council members decided to away with the distinction of game of skill and chance in the case of online gaming. Also, it levied a 28% GST rate on the full value of online gaming, casinos, and horse racing. Tax will be applicable on the face value of the chips purchased in the case of casinos, on the full value of the bets placed with bookmaker/totalisator in the case of Horse Racing, and on the full value of the bets placed in case of the Online Gaming.

These changes will come into effect after an amendment in the GST law.

The 28% tax rate is seen to hurt online gaming companies' earnings. But the reason why the decline in Nazara Tech shares is limited is because the company does not major impact on this GST tax rate, unlike Delta Corp whose business heavily surrounds gaming and casinos.

Nazara expects the 28% GST rate to impact only its skill-based real money gaming segment, which contributes 5.2% to its overall consolidated revenues for the fiscal year FY23.

In its regulatory filing, Nazara said, "With reference to the GST Council’s decision to levy a 28% goods and services tax (GST) on online gaming, Nazara Technologies Limited would like to clarify that this tax, once implemented, will apply only to the skill-based real money gaming segment of our business."

"The contribution of this segment to our overall consolidated revenues for the financial year FY23 was 5.2%," Nazara's filing said.

Further, Nazara said that it "will proactively take steps to mitigate any potential impact to this segment of our business, and we anticipate minimal impact to our overall revenues."

Nazara lastly stated that it remains committed to its growth agenda and will continue to pursue organic and inorganic opportunities across various segments in which it operates.

This led to comfort investors in Nazara Tech shares.

However, Delta Corp has not made any comments regarding the 28% GST rate and its impact on their business. It will be keenly watched!

Meanwhile, in FY23, Delta Corp's consolidated income stood at 1,258 crore and net profit stood at 261 crore for FY 2022-23. The company said it crossed 1,000 crore revenue milestone for the first time in gaming. Also, its online gaming posted a revenue of 191 crore in FY23 versus 162 crore in FY22, registering a growth of 18%.

Saket Patawari, Executive Director, Indirect Tax, Nexdigm, explains how the 28% GST will impact online gamers and poker players. He said, "hitherto, GST at 18% was levied on the Gross Gaming Revenue (GGR) or the platform fee which ranges from 5 to 20% of the value of bets placed."

Giving an example, Patawari explained that for instance, an online gamer or poker player has wagered Rs. 100, which includes a 10 towards platform fee. Thus, a player’s contribution towards the prize money would be Rs. 90. In this scenario, GST at 18% was levied on the platform fee namely Rs. 10. Now, in light of the GST Council’s decision, an upfront GST of 28% would be chargeable on the entire wager amount of Rs. 100. This would lead to a substantial reduction in the player’s contribution towards the prize money after deduction of the platform fee. Hence, in the present example, the player would now contribute Rs. 62 (Rs. 100 wager amount less Platform fee Rs. 10 less 28% GST = Rs. 62).

" The industry could resort to marginal increment in the bet/wager amounts to factor the 28% GST, so as to keep the prize pool more or less untouched. This could drive away the players as they would require to shell out more as compared to the present scenario, keeping in mind that the earnings will be subject to a TDS of 30% as well!," Patawari added.

Overall, Patawari also said, "Taxing online gaming platforms with a 28% rate, and that too on the entire gaming value may not go well with the industry. It looks like in the game of chance where this industry was betting big blind with their fortunes all-in, the GST council had a stronger hand."

In regards to gaming firms, Girish Sodani, Head of Equity Market at Swastika Investmart believes that the GST of 28% is expected to have a significant impact on the gaming industry. This tax hike will likely lead to several consequences for both game developers and consumers. Firstly, game developers may face higher production costs as they will have to pay more taxes on their equipment, software, and other resources. This could potentially discourage new game development ventures and hinder growth and innovation in the industry.

Moreover, Sodani added, "the increased GST rate may also result in higher prices for gaming consoles, accessories, and software, making them less affordable for consumers. This could potentially lead to a decline in sales and a decrease in the overall demand for gaming products. As a result, gaming companies may witness a decrease in their revenue and profitability."

Additionally, the higher tax rate may impact the competitiveness of the gaming industry in comparison to other entertainment sectors. Consumers might opt for alternative forms of entertainment that are not subjected to such high tax rates, potentially causing a shift away from gaming, Sodani said.

Accordingly, Swastika's equity expert concluded that, "the increase in GST to 28% is likely to have adverse effects on the gaming industry, including increased production costs, decreased consumer affordability, and reduced competitiveness."

On Delta Corp, Santosh Meena, Head of Research also of Swastika Investmart said, "Delta Corp. has experienced a significant decline, reaching the crucial support level of 175, which is considered critical due to its historical significance in March. It is important to note that a close below this level could potentially result in further weakness, potentially pushing the stock toward the 140 level."

On the upside, Meena said, the 200-day moving average (DMA) at 215 represents an immediate and critical resistance, followed by a major hurdle at 240. Breaking through these levels would require considerable strength and could signal a shift in momentum. However, if Delta Corp. manages to hold above the 175 support level, there is a possibility of a consolidation phase within the range of 200 to 240. This means that the stock may trade within this range without any significant directional bias.

Also, IIFL Securities said Delta Corp's 50-DMA is 235 and 200-DMA is around 214.egard

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Updated: 12 Jul 2023, 03:12 PM IST
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