The tax burden on foreign banks , which avail of funds from their parents for operations in India, may go up substantially following a recent order passed by the Mumbai Income Tax tribunal in the case of UAE-based Mashreq Bank.

The order has stated that the expenditure incurred by a foreign parent company for its operations in India will be taxed if it exceeds 5 per cent of the profit. Indian entities, however, are exempt from such a tax.

The decision holds good even if the country has a double-taxation treaty, which provides for similar tax treatment of foreign companies with its Indian counterparts.

Most foreign banks operating in India through branches or representative offices borrow funds from their parent offices and repatriate interest earned on such advances as profit. This is known as head-office expenditure.

Tax experts clarified that even if the Indian Income Tax Act provides for taxation of the expenditure of foreign banks and companies, these entities have been availing relief citing earlier orders of the tribunal.

These orders were passed in case of Degremont International, Banque indosuez and banque Nationale de Paris.

The foreign companies had cited that non-discrimination clause, where they had contended that since entire expenditure of the Indian companies is allowed as deduction in tax computation, the same law should hold good for foreign banks and companies.

The income tax department, on the other hand held that since the expenditure actually incurred by the parent foreign could be verified physically there was a reasonable restriction in allowing such a relief.