23. Income taxes
The domestic and foreign source component of profit / (loss) before income taxes is as follows:
| Year ended March 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
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Domestic |
$ | (4,439 | ) | $ | (5,342 | ) | $ | (4,121 | ) | |||
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Foreign |
106,306 | 60,635 | 85,181 | |||||||||
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Profit before income taxes |
$ | 101,867 | $ | 55,293 | $ | 81,060 | ||||||
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The Company’s provision for income taxes consists of the following:
| Year ended March 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
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Current taxes |
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Domestic taxes |
$ | — | $ | — | $ | — | ||||||
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Foreign taxes |
24,494 | 25,785 | 19,615 | |||||||||
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| 24,494 | 25,785 | 19,615 | ||||||||||
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Deferred taxes |
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Domestic taxes |
— | — | — | |||||||||
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Foreign taxes |
(9,063 | ) | (8,255 | ) | 1,565 | |||||||
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| (9,063 | ) | (8,255 | ) | 1,565 | ||||||||
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Provision for income taxes |
$ | 15,431 | $ | 17,530 | $ | 21,180 | ||||||
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Domestic taxes are nil as the Company is subject to income tax in Jersey, Channel Islands at a rate of 0%. Foreign taxes are based on applicable tax rates in each subsidiary’s jurisdiction.
On July 27, 2017, National Company Law Tribunal in India approved the scheme of amalgamation of Value Edge Research Services Limited (“Value Edge”) and WNS Global Services Private Limited (“WNS India”), pursuant to which, Value Edge was merged with and into WNS India. The merger resulted in the creation of a tax base of goodwill and certain other identifiable intangible assets in the financial statements of WNS India. WNS India is entitled to claim a tax benefit for amortization of goodwill and intangible assets in its future tax returns. The Company had previously recorded a deferred tax liability for the temporary differences between the tax base of identifiable intangible assets and its carrying amount in the Company’s consolidated financial statements upon the acquisition of Value Edge. As a result, the carrying value of such liability as at the effective date of the scheme of amalgamation, amounting to $1,686, was derecognized during the year ended March 31, 2018.
The Company in fiscal 2012 started operations in delivery centers in Pune, Mumbai and Chennai, India registered under the Special Economic Zone (“SEZ”) scheme. These operations were eligible for a 100% income tax exemption until fiscal 2016 and are eligible for a 50% income tax exemption from fiscal 2017 to fiscal 2026. During fiscal 2015, the Company started operations in new delivery centers in Gurgaon and Pune, India registered under the SEZ scheme. These operations are eligible for a 100% income tax exemption until fiscal 2019, and a 50% income tax exemption from fiscal 2020 to fiscal 2029. During fiscal 2018, the Company started operations in new delivery centers in Pune and Gurgaon, India registered under the SEZ scheme that are eligible for a 100% income tax exemption until fiscal 2022, and a 50% income tax exemption from fiscal 2023 to fiscal 2032. The Government of India pursuant to the Indian Finance Act, 2011 has also levied a minimum alternate tax (“MAT”) on the book profits earned by the SEZ units at the prevailing rate which is currently 21.55%. The Company’s operations in Costa Rica are eligible for a 50% income tax exemption from fiscal 2018 to fiscal 2021. During fiscal 2013, the Company started operations in a delivery center in Techno Plaza II, Manila which was eligible for a tax exemption that expired in fiscal 2017. During fiscal 2016, the Company started operations in a new delivery center in the Philippines which is eligible for a tax exemption until fiscal 2020. During fiscal 2017, the Company opened two additional delivery centers in Iloilo and Alabang, Philippines which are eligible for a 100% tax exemption until fiscal 2021. During fiscal 2018, the Company opened an additional delivery center in Alabang, Philippines which is eligible for a 100% tax exemption until fiscal 2022. The Government of Sri Lanka has exempted the profits earned from export revenue from tax, which enables the Company’s Sri Lankan subsidiary to continue to claim a tax exemption until fiscal 2018 and would be taxed at 14% on net basis with effect from April 1, 2018.
The “Tax Cuts and Jobs Act of 2017” was enacted on December 22, 2017 with an effective date of January 1, 2018. The reduction in the corporate tax rate from 35% to 21% will have an impact on the various current and deferred tax items recorded by the Company’s subsidiaries. At March 31, 2018, the Company has not completed its initial accounting for the tax effects of the Act. However, a reasonable estimate of the effects of such enactment has been made by recognizing a net one-time provisional tax benefit of $5,212, primarily resulting from the adjustments to its deferred tax balances arising from intangibles, stock compensation, losses and accruals and transition tax on undistributed earnings of foreign subsidiaries. A provisional amount of $5,212 has been included as a component of our income tax expense for fiscal 2018, thereby reducing the effective tax rate by 5.12% for fiscal 2018. The Company is still analyzing certain aspects of the Act and refining its calculations, and expects to update these provisional amounts during the measurement period ending on December 31, 2018, as additional information is obtained, prepared and analyzed.
If the income tax exemption was not available, the additional income tax expense at the respective statutory rates in India, Sri Lanka and Philippines would have been approximately $9,368, $5,171 and $5,072 for the years ended March 31, 2018, 2017 and 2016, respectively. Such additional tax would have decreased the basic and diluted earnings per share for the year ended March 31, 2018 by $0.19 and $0.18, respectively ($0.10 and $0.10, respectively for the year ended March 31, 2017 and $0.10 and $0.09, respectively, for the year ended March 31, 2016).
Income taxes recognized directly in equity are as follows:
| Year ended March 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
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Current taxes: |
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Excess tax deductions related to share-based payments |
(685 | ) | (270 | ) | (229 | ) | ||||||
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| $ | (685 | ) | $ | (270 | ) | $ | (229 | ) | ||||
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Deferred taxes: |
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Excess tax deductions related to share-based payments |
(1,135 | ) | 715 | (688 | ) | |||||||
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| $ | (1,135 | ) | $ | 715 | $ | (688 | ) | |||||
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Total income tax recognized directly in equity |
$ | (1,820 | ) | $ | 445 | $ | (917 | ) | ||||
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Income taxes recognized in other comprehensive income are as follows:
| Year ended March 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
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Current taxes |
— | — | — | |||||||||
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Deferred taxes: |
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Unrealized gain/(loss) on cash flow hedging derivatives |
(9,409 | ) | 6,921 | (4,259 | ) | |||||||
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Total income tax recognized directly in other comprehensive income |
$ | (9,409 | ) | $ | 6,921 | $ | (4,259 | ) | ||||
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The reconciliation of estimated income tax to provision for income taxes:
| Year ended March 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
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Profit before income taxes |
$ | 101,867 | $ | 55,293 | $ | 81,060 | ||||||
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Income tax expense at tax rates applicable to individual entities |
32,702 | 21,765 | 28,067 | |||||||||
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Effect of: |
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Items not deductible for tax |
221 | 455 | 771 | |||||||||
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Exempt income |
(11,250 | ) | (7,706 | ) | (6,845 | ) | ||||||
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Non tax deductible goodwill impairment |
— | 4,335 | — | |||||||||
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(Gain)/Loss in respect of which deferred tax (liability)/asset not recognized due to uncertainty and ineligibility to carry forward |
324 | (105 | ) | 259 | ||||||||
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Recognition of unutilized tax benefits / Unrecognized losses utilized |
— | (1,220 | ) | (294 | ) | |||||||
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Temporary difference that will reverse during tax holiday period |
22 | 1,580 | 30 | |||||||||
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Change in tax rate and law |
(5,685 | ) | 78 | (152 | ) | |||||||
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Provision for uncertain tax position |
— | (1,499 | ) | 2 | ||||||||
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State taxes |
317 | 14 | 12 | |||||||||
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Due to acquisitions and merger |
(1,686 | ) | — | — | ||||||||
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One time tax on undistributed earnings |
266 | — | — | |||||||||
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Others, net |
200 | (167 | ) | (670 | ) | |||||||
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Provision for income taxes |
$ | 15,431 | $ | 17,530 | $ | 21,180 | ||||||
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Deferred taxes for the year ended March 31, 2018 arising from temporary differences and unused tax losses can be summarized below:
| Opening Balance |
Additions due to acquisition |
Recognized in statement of income |
Recognized in equity |
Recognized in/ Reclassified from other comprehensive income |
Foreign currency translation |
Closing balance |
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Deferred tax assets: |
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Property and equipment |
$ | 5,648 | $ | (11 | ) | $ | 1,623 | $ | — | $ | — | $ | 31 | $ | 7,291 | |||||||||||||
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Net operating loss carry forward |
5,722 | — | (2,950 | ) | — | — | 107 | 2,879 | ||||||||||||||||||||
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Accruals deductible on actual payment |
5,641 | — | 1,661 | — | — | 122 | 7,424 | |||||||||||||||||||||
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Share-based compensation expense |
12,264 | — | (702 | ) | 1,135 | — | 73 | 12,770 | ||||||||||||||||||||
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Minimum alternate tax |
167 | — | 257 | — | — | (4 | ) | 420 | ||||||||||||||||||||
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Others |
975 | — | (661 | ) | — | — | 14 | 328 | ||||||||||||||||||||
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Total deferred tax assets |
$ | 30,417 | $ | (11 | ) | $ | (772 | ) | $ | 1,135 | $ | — | $ | 343 | $ | 31,112 | ||||||||||||
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Deferred tax liabilities: |
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Intangibles |
21,123 | 6 | (8,555 | ) | — | — | 88 | 12,662 | ||||||||||||||||||||
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Unrealized gain/(loss) on cash flow hedging and investments |
12,294 | — | (1,280 | ) | — | (9,409 | ) | 154 | 1,759 | |||||||||||||||||||
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Others |
1,113 | — | — | — | — | (5 | ) | 1,108 | ||||||||||||||||||||
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Total deferred tax liabilities |
$ | 34,530 | $ | 6 | $ | (9,835 | ) | $ | — | $ | (9,409 | ) | $ | 237 | $ | 15,529 | ||||||||||||
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Net deferred tax assets/(liabilities) |
$ | (4,113 | ) | $ | (17 | ) | $ | 9,063 | $ | 1,135 | $ | 9,409 | $ | 106 | $ | 15,583 | ||||||||||||
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Deferred taxes for the year ended March 31, 2017 arising from temporary differences and unused tax losses can be summarized below:
| Opening balance |
Additions due to acquisition during the year |
Recognized in statement of income |
Recognized in equity |
Recognized in/ Reclassified from other comprehensive income |
Foreign currency translation |
Closing balance |
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Deferred tax assets: |
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Property and equipment |
$ | 5,512 | $ | (873 | ) | $ | 932 | $ | — | $ | — | $ | 77 | $ | 5,648 | |||||||||||||
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Net operating loss carry forward |
3,684 | — | 2,026 | — | — | 12 | 5,722 | |||||||||||||||||||||
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Accruals deductible on actual payment |
5,352 | 70 | (1 | ) | — | — | 220 | 5,641 | ||||||||||||||||||||
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Share-based compensation expense |
11,008 | — | 1,781 | (715 | ) | — | 190 | 12,264 | ||||||||||||||||||||
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Minimum alternate tax |
68 | — | 96 | — | — | 3 | 167 | |||||||||||||||||||||
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Others |
362 | — | 679 | — | — | (66 | ) | 975 | ||||||||||||||||||||
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Total deferred tax assets |
$ | 25,986 | $ | (803 | ) | $ | 5,513 | $ | (715 | ) | $ | — | $ | 436 | $ | 30,417 | ||||||||||||
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Deferred tax liabilities: |
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Intangibles |
(712 | ) | 24,577 | (2,769 | ) | — | — | 27 | 21,123 | |||||||||||||||||||
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Unrealized gain/(loss) on cash flow hedging and investments |
4,857 | — | 27 | — | 6,921 | 489 | 12,294 | |||||||||||||||||||||
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Others |
1,108 | — | — | — | — | 5 | 1,113 | |||||||||||||||||||||
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Total deferred tax liabilities |
$ | 5,253 | $ | 24,577 | $ | (2,742 | ) | $ | — | $ | 6,921 | $ | 521 | $ | 34,530 | |||||||||||||
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Net deferred tax assets/(liabilities) |
$ | 20,733 | $ | (25,380 | ) | $ | 8,255 | $ | (715 | ) | $ | (6,921 | ) | $ | (85 | ) | $ | (4,113 | ) | |||||||||
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Deferred taxes for the year ended March 31, 2016 arising from temporary differences and unused tax losses can be summarized below:
| Opening balance |
Additions due to acquisition during the year |
Recognized in statement of income |
Recognized in equity |
Recognized in/ Reclassified from other comprehensive income |
Foreign currency translation |
Closing balance |
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Deferred tax assets: |
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Property and equipment |
$ | 6,538 | $ | — | $ | (724 | ) | $ | — | $ | — | $ | (302 | ) | $ | 5,512 | ||||||||||||
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Net operating loss carry forward |
4,304 | — | (448 | ) | — | — | (172 | ) | 3,684 | |||||||||||||||||||
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Accruals deductible on actual payment |
4,201 | — | 1,443 | — | — | (292 | ) | 5,352 | ||||||||||||||||||||
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Share-based compensation expense |
6,110 | — | 4,480 | 688 | — | (270 | ) | 11,008 | ||||||||||||||||||||
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Minimum alternate tax |
8,327 | — | (7,941 | ) | — | — | (318 | ) | 68 | |||||||||||||||||||
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Others |
1,444 | — | (1,179 | ) | — | — | 97 | 362 | ||||||||||||||||||||
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Total deferred tax assets |
$ | 30,924 | $ | — | $ | (4,369 | ) | $ | 688 | $ | — | $ | (1,257 | ) | $ | 25,986 | ||||||||||||
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Deferred tax liabilities: |
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Intangibles |
2,045 | 837 | (3,477 | ) | — | — | (118 | ) | (712 | ) | ||||||||||||||||||
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Unrealized gain/(loss) on cash flow hedging and investments |
9,821 | — | (436 | ) | — | (4,259 | ) | (269 | ) | 4,857 | ||||||||||||||||||
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Others |
— | — | 1,108 | — | — | — | 1,108 | |||||||||||||||||||||
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Total deferred tax liabilities |
$ | 11,866 | $ | 837 | $ | (2,804 | ) | $ | — | $ | (4,259 | ) | $ | (387 | ) | $ | 5,253 | |||||||||||
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Net deferred tax assets/(liabilities) |
$ | 19,058 | $ | (837 | ) | $ | (1,565 | ) | $ | 688 | $ | 4,259 | $ | (870 | ) | $ | 20,733 | |||||||||||
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Deferred tax presented in the statement of financial position is as follows:
| As at | ||||||||
| March 31, 2018 |
March 31, 2017 |
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Deferred tax assets |
27,395 | 16,687 | ||||||
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Deferred tax liabilities |
(11,812 | ) | (20,800 | ) | ||||
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Net deferred tax assets |
$ | 15,583 | $ | (4,113 | ) | |||
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There are unused tax losses amounting to $17,969 as at March 31, 2018 for which no deferred tax asset has been recognized as these losses relate to a tax jurisdiction where the group entity has had past losses and there is no conclusive evidence to support the view that sufficient taxable profit will be generated by such group entity in the future to offset such losses. The expiry dates of the tax benefit for these losses depend on the local tax laws of the jurisdiction and, if not utilized, would expire on various dates starting from financial year 2019 to 2023.
Deferred income tax liabilities on earnings of Company’s subsidiaries have not been provided as such earnings are deemed to be permanently reinvested in the business and the Company is able to control the timing of the reversals of temporary differences associated with these investments. Accordingly, temporary difference on which deferred tax liability has not been recognized amounts to $494,571, $401,857 and $301,043 as at March 31, 2018, 2017 and 2016, respectively.
From time to time, the Company receives orders of assessment from the Indian tax authorities assessing additional taxable income on the Company and/or its subsidiaries in connection with their review of their tax returns. The Company currently has orders of assessment outstanding for various years through fiscal 2014, which assess additional taxable income that could in the aggregate give rise to an estimated $43,583 (March 31, 2017: $37,085) in additional taxes, including interest of $17,234 (March 31, 2017: $13,744). These orders of assessment allege that the transfer prices the Company applied to certain of the international transactions between WNS Global and its other wholly-owned subsidiaries were not on arm’s length terms, disallow a tax holiday benefit claimed by the Company, deny the set off of brought forward business losses and unabsorbed depreciation and disallow certain expenses claimed as tax deductible by WNS Global. The Company has appealed against these orders of assessment before higher appellate authorities.
In addition, the Company has orders of assessment pertaining to similar issues that have been decided in favor of the Company by appellate authorities, vacating the tax demands of $45,002 (March 31, 2017: $44,573) in additional taxes, including interest of $13,897 (March 31, 2017: $13,740). The income tax authorities have filed or may file appeals against these orders at higher appellate authorities.
Uncertain tax positions are reflected at the amount likely to be paid to the taxation authorities. A liability is recognized in connection with each item that is not probable of being sustained on examination by taxing authority. The liability is measured using single best estimate of the most likely outcome for each position taken in the tax return. Thus, the provision would be the aggregate liability in connection with all uncertain tax positions. As of March 31, 2018, the Company has provided a tax reserve of $12,370 (March 31, 2017: $12,432) primarily on account of the Indian tax authorities’ denying the set off of brought forward business losses and unabsorbed depreciation.
As at March 31, 2018, corporate tax returns for years ended March 31, 2015 and onward remain subject to examination by tax authorities in India.
Based on the facts of these cases, the nature of the tax authorities’ disallowances and the orders from appellate authorities deciding similar issues in favor of the Company in respect of assessment orders for earlier fiscal years and after consultation with the Company’s external tax advisors, the Company believe these orders are unlikely to be sustained at the higher appellate authorities. The Company has deposited $13,416 (March 31, 2017: $12,031) of the disputed amounts with the tax authorities and may be required to deposit the remaining portion of the disputed amounts with the tax authorities pending final resolution of the respective matters.
Others
On March 21, 2009, the Company received an assessment order from the Indian service tax authority, demanding payment of $5,341 of service tax and related penalty for the period from March 1, 2003 to January 31, 2005. The assessment order alleges that service tax is payable in India on BPM services provided by the Company to clients based abroad as the export proceeds are repatriated outside India by the Company. In response to the appeal filed by the Company with appellate tribunal against the assessment order in April 2009, the appellate tribunal has remanded the matter back to lower tax authorities to be adjudicated afresh. After consultation with Indian tax advisors, the Company believes this order of assessment is more likely than not to be upheld in favor of the Company. The Company intends to continue to vigorously dispute the assessment.