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Global Captive Centers in India: Can Add Value if Set Up Differently

Major forces of change, such as the emergence of new technologies, maturing of platform-based business models and other competitive threats are forcing businesses to transform themselves. Another driver of large-scale change is the pandemic, which has led to new ways of working. Hybrid models, where a large chunk of employees work remotely and not from a designated office space, are now becoming the norm. Although some companies have begun to announce plans for their employees to return to workplaces, the consensus opinion is that a hybrid model is going to become the new norm because it significantly reduces operating costs; also, employees are finding it more convenient.

One area where the above changes are clearly visible relates to how large and medium enterprises across industries are looking at outsourcing to countries such as India. In recent years, the contours of both IT outsourcing and BPO have evolved rapidly; the above-mentioned forces of change are only accelerating the velocity of change.

A survey by NASSCOM recently found that by 2025, MNCs are likely to set up 500 new Global Captive Centers (GCCs) in India. Until two years ago, the number of such units established annually was around 50. This demonstrates that India’s large talent pool continues to be attractive. But it’s a different world we live in than even five years ago.

Earlier, most MNCs viewed their GCCs in India as low-cost delivery centers and design, architecture, prioritization of projects etc. were all the exclusive domain of Business/Technology leaders in the parent company. Cost arbitrage opportunities still exist in India vis-à-vis western countries, and thus, cost savings will remain an important objective for evaluating GCC performance. However, the ongoing shifts are raising the bar on how GCCs are expected to contribute to their parent organizations. Along with cost-efficient service delivery, enhancing automation, driving process innovation and enabling adoption of new technologies and architecture paradigms will all become important performance criteria. In some cases, there may even be expectations of new product innovations coming out of the Indian GCC.

MNCs will need appropriate operating models and talent to deliver on the potential. Employee contracts need to be suitably structured. IPR must be appropriately protected. Compliance with data privacy and other regulations must be ensured. As MNCs plan and implement their GCCs in India, they must keep in mind that India too is changing rapidly. They must formulate their strategies keeping in mind four specific factors:

  • Quality infrastructure (including reliable electricity and broadband connectivity) is now available across the country, and not limited to Tier 1 cities. This gives companies a wider choice of locating their GCCs.
  • As a result of reverse-migration triggered by the pandemic, talent too is available in smaller cities across the country. Given the possibility of remote working, the proximity to families and lower cost of living have become significant incentives; in fact, many employees prefer to live and work from such locations.
  • Many state governments are offering incentives to companies establishing operations in less-developed parts of their states and creating employment opportunities.
  • The country’s FDI, income tax and GST regimes are also frequently being tweaked to make India more competitive and business-friendly.

All this means that making choices and decisions around business objectives, investment routing, structuring and locations based on criteria and checklists that were relevant even a couple of years ago may lead to sub-optimal outcomes. Your GCC in India has the potential to be a global Centre of Excellence- so make sure that you make the right decisions so that your investments deliver ROI in ways that go far beyond cost arbitrage.

Mr. Sandip Sen, former Global CEO of Aegis and a well-known veteran of the BPO industry, put it thus: “These are exciting times for the Business Process Management industry for many reasons. Use of Artificial Intelligence (AI), analytics and higher levels of automation mean that players at the lower end of the value chain will need to raise their capabilities. In the next phase, GCCs will focus more on innovation as well as technology enablement aimed at enterprises to embrace ecosystem-based business models and higher levels of customer-centricity. But to achieve all this, companies have to take an approach that is very different from what they might have taken some years ago”.

 

Image Credits: Photo by Alex Kotliarskyi on Unsplash

MNCs will need appropriate operating models and talent to deliver on the potential. Employee contracts need to be suitably structured. IPR must be appropriately protected. Compliance with data privacy and other regulations must be ensured. 

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Project Cost in Infrastructure Projects: Concept, Challenges and Way Forward

The IMF and Central Statistic Organization had dubbed the Indian economy as the fastest growing economy back in 2019. Moving forward, in 2021 despite the havoc wrecked by the pandemic on advanced economies across the globe, the IMF has kept India’s growth forecast unchanged at 9.5%. In order to sustain India’s growth momentum, the development of country’s infrastructure sector is cogent. The National Infrastructure Pipeline has been the focus of current policies, with an unprecedented increase in capital expenditure allocation for FY 2021-22 by 34.5% to INR 5.5 lakh crore to propel infrastructure creation. However, the April-June 2021 report of The Ministry of Statistics states that 470 projects sanctioned by the centre suffered from a cost overrun of 61.5 percent, that is Rs 4,46,169.37 crore[1].

Project cost remains the central concern for any seminal discussion on infrastructural projects in India or around the world. This is the nebulous point where a host of stakeholders would converge to dispute, disagree, or litigate. This article aims to discuss the concept of project cost and its various implications for the different stakeholders involved.

Introduction to Infrastructure and Projects

 

Costs that are reasonably incurred for the acquisition and construction of infrastructure are referred to as infrastructure costs. Hence, Project cost could mean the total cost of an infrastructure project.  In India, there is no clear definition of the term infrastructure. However, on 1st March 2012, the Cabinet Committee on Infrastructure approved the framework to include a harmonised master list of sub-sectors to guide all the agencies responsible for supporting infrastructure in India. These sub-sectors include transports and logistics, energy, water and sanitation, communication, and social infrastructure. Out of the plethora of these sub-sectors, during the fiscals of 2020-2025, it is expected that sub-sectors such as Energy (24%), Roads (19%), Railways (13%) and Urban (16%) shall constitute 70%of the projected capital expenditure in infrastructure in India[2]. The total capital expenditure as per the report is expected to be 102 lakh crore Indian rupees. Furthermore, in India, the current investment in infrastructure is USD 3.9 Trillion, and the required investment is USD 4.5 Trillion, leaving a gap of USD 526 Billion[3]. Therefore, the energy and infrastructure sector are instrumental in generating tremendous employment opportunities and drive a substantial increase in GDP per annum in India as well as countries all over the world.

 

Structure of Project Finance Transactions

 

The main parties involved in a project finance transaction structure are (i) The Authority or the Government (ii) The Private Party Investors/Developers, Sponsors or Promotors and (iii) the Lenders. These three parties are key players responsible for the determination of project costs in infrastructure and construction projects. The principal point of convergence for these three players is the project company (i.e., also known as special purpose vehicle) set up by the private party investors under which the infrastructure project is formed and under which the project exists in the concession agreement. The project cost is mainly estimated by the private party and the lenders who would finance in the form of equity and debt. The typical financial structure for infrastructure projects has a debt-to-equity ratio of 75:25. However, the ratio may vary depending upon the risks involved.

                Illustration I: Key parties that influence the project cost of an infrastructure project

                                                                                                                     

 

Risks that affect the Determination of Project Cost

 

Every project has certain risks attached to its completion. These risks influence the determination of project costs by the authority, the private parties and the lenders. The risks, in turn, then affect the total cost of the project. The risks affecting the three parties are explained below:

 

                                Illustration II: Risks that affect the determination of project cost

    

 Risk for Authority

Risk for Private Party
Investors

Risk for Lender

Technical or physical risks

Economic or market risks

Economic or market risks

Risk relating to land acquisition

Construction and completion risk – cost overrun/time
overrun/delays

Financing risks

For eg. Technical or physical risks may include risks
associated with
technology during
construction and operation as well as social and environmental risks.

For eg. Economic or
market risks may include input and output price variations, variation in
demand, debt/equity financing as well as counterparty risks.

For eg. Economic or
market risks may include input and output price variations, variation in
demand, debt/equity financing as well as counterparty risks.

The other risks that affect the cost of the project are contractual and legal risks, resource and raw material availability risks, demand risks, design risks, force majeure, property damage, permits, licenses, authorization, supply risk, social and environmental risks.

 

The Major Risks affecting Project Cost in India: Cost Overrun and Time Overrun

 

Out of the myriad of risks affecting project cost, the major risks in India are the risks associated with cost and time overruns. As many as 525 infrastructure projects were hit by time overruns, and as many as 470 infrastructure projects, each worth Rs 150 crore or more, were hit by cost overruns of over Rs 4.38 Trillion owing to delays, according to a report by the Ministry of Statistics, cited previously[4] The main causes for time overruns are delay in obtaining forest and environmental clearances, delay in land acquisition,  and lack of infrastructure support.  As per the report, there are other reasons like delay in project financing, delay in finalisation of detailed engineering, alteration in scope, delay in ordering and equipment supply, law, geological issues, contractual complications and delay in tendering.

 

The Key Elements of Project Cost

 

The elements of ‘costing’ include variables such as raw materials, labour, and expenses. Thus, for infrastructure projects as well, at the time of estimation of cost, these variables would come into play. The factors affecting cost for a public-private partnership project could be the following:

 

                        Illustration III: Factors affecting Cost of Projects: PPP model projects

FACTORS AFFECTING COST OF PROJECTS : PPP MODEL PROJECTS

Materials

Labour

Consultants

Contractor

Client

External
Factors

Dispute
Resolution

Costs and delays
associated with procurement and delivery of materials, import costs

Availability or non –
availability of skilled labour.

Recurring changes in
design

Poor site management
and supervision

Change orders

Force Majeure events
and weather changes.

International dispute
resolution in outside jurisdictions[1]

Unavailability of raw
materials

Poor management of
labour

Delay in approvals and
inspections

Inept subcontractors

Political and policy
changes such as MII[2]

Approvals from
authorities

Costly and time-consuming
domestic litigation

Wastage and theft of
materials – 13 to 14 million construction waste (FY 2000-2001)[3]

Increasing cost of
labour

Inaccuracy in design,
costs associated with knowledge transfer

Poor planning,
scheduling and cash flow management by Contractors

Poor communication for
quality and cost

Accidents

High legal costs and high
arbitrators fees[4].
Non-realisation of arbitral awards and court decree amounts.

 

 

Case Study: The Mumbai Monorail – An EPC Contract Model

 

Time and cost overruns in projects lead to disputes and arbitrations. A suitable example is the  Mumbai Monorail which has entered disputes and arbitration between the Contractor and the Authority over its project cost[9]. The development authority MMRDA entered into a contract with L&T Scomi Engineering for the construction of the Mumbai Monorail project. The original project cost between the Private Party Investors and the Authority was estimated to be Rs 2,700 crore, after which disputes arose. The Authority had claims against the Contractor for not completing the project task on time. The arguments of the Contractor pertained to the cost escalations caused by delays due to the fault of the Authority.  In 2019, the Bombay High Court appointed an arbitrator to settle the dispute. Currently, the dispute is still in the arbitration stage. Furthermore, post-December 2018, the MMRDA had taken over the Operation and Maintenance of the Mumbai Monorail project from L&T Scomi Engineering. Due to the Make in India policy, the tenders for manufacturing of the Mumbai Monorail were altered to encourage manufacturers and Indian technology partners to participate and fulfil the demands of manufacturing the additional monorail rakes[10]. Among other issues currently plaguing the Mumbai Monorail project, such as unavailability of a sufficient number of rakes to keep the services running and an inadequate number of spare parts, the widening deficit between revenue and O&M costs, remains primary.   

   

Way Forward

 

As per the report by the Ministry of Statistics cited above, the reason for cost and time overruns can be largely attributed to the state-wise lockdown due to the COVID-19 pandemic, which has been causing great hindrance to the implementation of infrastructure projects. Time and cost overruns in projects lead to disputes and arbitrations. Furthermore, in the procurement stage of projects, biddings in India happen with the project sponsor underbidding for the project so as to survive the competitive market. However, the underbidding combined with lack of margin included in the overall costs by contractors or sponsors often overlook inevitable hidden and unforeseeable costs which in turn enhance the final costs of the project. For instance, the Mumbai-Monorail project is a classic example of cost overrun. The solution would be to have a clear understanding of the project agreements, risks involved in the project particularly the conditions of force majeure, an objective evaluation of project cost while bidding taking into account uncertainties relating to raw material procurement, labour laws, land acquisition and risks related to cost and time overruns due to decisions of the awarding authority or public policy or any of the factors described above. The compensation clauses should be coherent and unambiguous, and in line with actual project cost incurred in the project leaving less scope for future disputes and arbitrations. Furthermore, it would be useful for the contractors / concessionaires , while making claims in an infrastructure project, to do it in a timely manner while maintaining clear and systematic evidentiary documentation, to substantiate the claims that may have arisen during the course of the project.

References: 

[1] http://www.cspm.gov.in/english/flr/FR_Mar_2021.pdf

[2] Finance Minister Smt. Nirmala Sitharaman releases Report of the Task Force on National Infrastructure Pipeline for 2019-2025, dated 31 December 2019, Press Information Bureau, pib.gov.in (2019), https://pib.gov.in/Pressreleaseshare.aspx?PRID=1598055 (last visited Sep 17, 2021).

[3] Forecasting Infrastructure Investment Needs and gaps, Global Infrastructure Outlook – A G20 INITIATIVE, https://outlook.gihub.org/ (last visited Sep 17, 2021).

[4] 422nd Flash Report on Central Sector Projects (Rs.150 Crore and Above), March 2021, Ministry of Statistics and Programme Implementation Infrastructure and Project Monitoring Division (2021), Available at: http://www.cspm.gov.in/english/flr/FR_Mar_2021.pdf (last visited Sep 17, 2021)

[5] Joseph Mante, Issaka Ndekugri & Nii Ankrah, Resolution of Disputes Arising From Major Infrastructure Projects In Developing Countries Fraunhofer, https://www.irbnet.de/daten/iconda/CIB_DC24504.pdf (last visited Sep 17, 2021).

[6] Make in India Initiative, Government of India.

[7] Sandeep Shrivastava and Abdol Chini M.E. Rinker Sr., Construction Materials and C&D Waste in India, School of Building Construction University of Florida, USA, https://www.irbnet.de/daten/iconda/CIB14286.pdf (last visited Sep 17, 2021).

[8] Amendments to the Arbitration and Conciliation Act, 1996, August 2014, Law Commission of India, Report No.246.

[9] Larsen and Toubro Limited Scomi Engineering BHD vs. Mumbai Metropolitan Region Development Authority MANU 2018 SC 1151, Arbitration Petition (C) No. 28 OF 2017.

[10]Adimulam, S. (2021, March 2). Mumbai: Monorail rakes will be made in India. Mumbai. Retrieved September 17, 2021, from https://www.freepressjournal.in/mumbai/mumbai-monorail-rakes-will-be-made-in-india.

 

 

Image Credits: Photo by Wade Austin Ellis on Unsplash

The solution would be to have a clear understanding of the project agreements, risks involved in the project particularly the conditions of force majeure, an objective evaluation of project cost while bidding taking into account uncertainties relating to raw material procurement, labour laws, land acquisition and risks related to cost and time overruns due to decisions of the awarding authority or public policy or any of the factors described above.

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Income Tax Returns for AY 2020-21: Ready Referencer

With the extended time limit for filing of Income Tax Return (for AY 2020-21), u/s. 139(1), without late fees, for Non-Audit cases and for Non-Corporate assessees of 31st December 2020 fast approaching, given below is a quick guide for ready reference of some key changes that have been made in the respective Income tax return forms for this year.

Further, the conditions and features for eligibility of forms that are applicable for filing the correct income tax returns are also specified as follows:

Key Procedural Changes:

  • ITR 1 to ITR 4 can be filed using PAN or Aadhar by Individuals.
  • The submitted ITR forms display the ITR-V with a watermark ‘Not Verified’ until the same is verified either electronically by EVC or by sending the same via post after manual signing.
  • The unverified form ITR-V will not contain any income, deduction and tax details. The unverified form will only contain basic information, E-filing Acknowledgement Number and Verification part.
  • The unverified acknowledgement is titled as ‘INDIAN INCOME TAX RETURN VERIFICATION FORM’ & final ITR-V is titled as ‘INDIAN INCOME TAX RETURN ACKNOWLEDGEMENT’.
  • Return filed in response to notice u/s. 139(9), 142(1), 148, 153A, and 153C must have DIN.
  • There is a separate disclosure for Bank accounts in case of Non-Residents who are claiming income tax refund and not having a bank account in India.

COVID related Changes:

  • The Government had extended the time limit for claiming tax deduction u/CH VIA to 31st July 2020, and the details of the same need to be reported in Schedule DI (details of Investment).
  • The time limit for investing the proceeds or capital gains in other eligible assets, so as to claim exemptions u/s 54/ 54B/ 54F/ 54EC, had been extended to 30th September 2020.
  • Penal interest u/s. 234A @ 1% p.m., where the payments were due between 20-03-20 to 29-06-20 and such amounts were paid on or before 30-06-20, had been reduced to 75%, vide ordinance dated 31-03-20.
  • Period of forceful stay in India, beginning from quarantine date or 22-03-20 in any other case up to 31-03-20, is to be excluded, for the purpose of determining residential status in India.[1]

Consequences of Late filing of Return of Income:

  • Late Fees u/s. 234F of INR. 5,000 up to 31.12.20 and INR. 10,000 up to 31.03.21. In case of total income up to 5 Lacs, the penalty is INR. 1,000.
  • Penal Interest u/s. 234A @ 1% per month
  • Reduced to 75%. vide Ordinance dated 31.03.20, where the payments were due between 20.03.20 to 29.06.20, and such amounts were paid on or before 30.06.20.
  • Vide CBDT Notification dt 24.06.2020, no interest u/s 234A if Self-Assessment tax liability is less than 1 Lac and the same has been paid before the original due date.
  • In case of a belated return, loss under any head of Income (except unabsorbed depreciation) cannot be carried forwarded.
  • Deduction claims u/s. 10A, 10B, 80-IA, 80-IB, etc would not be allowed.

Consequences of Late filing of Return of Income:

  • Late Fees u/s. 234F of INR. 5,000 up to 31.12.20 and INR. 10,000 up to 31.03.21. In case of total income up to 5 Lacs, the penalty is INR. 1,000.
  • Penal Interest u/s. 234A @ 1% per month
  • Reduced to 75%. vide Ordinance dated 31.03.20, where the payments were due between 20.03.20 to 29.06.20, and such amounts were paid on or before 30.06.20.
  • Vide CBDT Notification dt 24.06.2020, no interest u/s 234A if Self-Assessment tax liability is less than 1 Lac and the same has been paid before the original due date.
  • In case of a belated return, loss under any head of Income (except unabsorbed depreciation) cannot be carried forwarded.
  • Deduction claims u/s. 10A, 10B, 80-IA, 80-IB, etc would not be allowed.

Vide CBDT Notification dt 24.06.2020, no interest u/s 234A if Self-Assessment tax liability is less than 1 Lac and the same has been paid before the original due date.

  1. Section 5A: Apportionment of income between spouses governed by the Portuguese Civil Code.
  2.  115BBDA: Tax on dividend from companies exceeding Rs. 10 Lakhs; 115BBE: Tax on unexplained credits, investment, money, etc. u/s. 68 or 69 or 69A or 69B or 69C or 69D.
  3. Inserted in sec 139(1) by Act No. 23 of 2019, w.e.f. 1-4-2020:

Provided also that a person referred to in clause (b), who is not required to furnish a return under this sub-section, and who during the previous year:

  • has deposited an amount or aggregate of the amounts exceeding one crore rupees in one or more current accounts maintained with a banking company or a co-operative bank; or
  • has incurred expenditure of an amount or aggregate of the amounts exceeding two lakh rupees for himself or any other person for travel to a foreign country; or
  • has incurred expenditure of an amount or aggregate of the amounts exceeding one lakh rupees towards consumption of electricity; or
  • fulfils such other conditions as may be prescribed,

Shall furnish a return of his income on or before the due date in such form and verified in such manner and setting forth such other particulars, as may be prescribed.

4. Section 57: Deduction against income chargeable under the head “Income from other sources”.

5. Schedule DI: Investment eligible for deduction against income (Ch VIA deductions) to be bifurcated between paid in F.Y.19-20 and during the period 01-04-20 to 31-07-20.

6.High-value Transaction: Annual Cash deposit exceeding Rs. 1 crore or Foreign travel expenditure exceeding Rs. 2 Lakhs, Annual electricity expenditure exceeding Rs. 1 Lakh.
7.Schedule 112A: From the sale of equity share in a company or unit of equity- oriented fund or unit of a business trust on which STT is paid under Section 112A.

8. 115AD(1)(iii) proviso: for Non-Residents – from the sale of equity share in a company or unit of equity-oriented fund or unit of a business trust on which STT is paid under Section 112A.
9. Section 40(ba): any payment of interest, salary, bonus, commission or remuneration paid to a member in case of Association of Person (AOP) or Body of Individual (BOI).

10. Section 90 & 90A: Foreign tax credit in cases where there is a bilateral agreement; Section 91: Foreign tax credit in cases of no agreement between the countries.

[1] Circular No 11 of 2020 dated 08th May 2020.

References

Image Credits: Photo by Markus Winkler from Pexels

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