Brokerages on Standby: Assessing GST Notice Impact on Zomato Before Factoring In

Zomato, in a recent filing to the exchanges, disclosed the receipt of a show cause notice dated December 26, 2023, from the Directorate General of GST Intelligence, Pune Zonal Unit, as reported by JM Financial Institutional Securities. The notice requires Zomato to provide reasons why a tax liability of slightly over Rs 4 billion, pertaining to delivery charges collected from customers on behalf of delivery partners, should not be demanded, along with relevant interest and penalty.

The period in question spans from October 29, 2019, to March 31, 2022, suggesting that the notice primarily relates to Zomato's food delivery business. JM Financial Institutional Securities, in its report, estimates that if the notice is extended until the first half of the fiscal year 2024 (April 1, 2022, to September 30, 2023), the potential tax liability could increase by another Rs 4.25 billion, excluding interest and penalty. Notably, Zomato already pays GST on delivery charges in its Blinkit business, eliminating any expected liability in that segment.

The report emphasizes that in the event of an unfavorable outcome for Zomato, the platform might pass the GST burden directly to end customers. However, if Zomato chooses not to transfer the GST burden to customers, the direct impact on its food delivery profitability (adjusted EBITDA) by the second quarter of the fiscal year 2024 could be significant, around 0.9%, considering its reported adjusted EBITDA of 2.6% of Gross Order Value (GOV) in the latest quarter.

With a substantial cash balance of Rs 118 billion, Zomato appears financially equipped to cover the impact of any adverse orders related to historical dues. However, the report underscores the importance of monitoring the duration of the case and the remedial measures the company takes to address potential future tax liability demands.

(With Agency Inputs)