Budget 2026: Experts seek clearer rules on tax deduction for foreign banks’ HO expenses

As the Union Budget approaches, tax experts from the banking and capital markets sector have called for clearer rules and an updated framework for claiming tax deductions on head office (HO) expenditure incurred by foreign banks operating in India through branch structures.Deloitte India's Vijay Mani, Partner, Banking & Capital Markets Leader, and Russell Gaitonde, Partner, shared their expectations and recommendations regarding the issue.Explaining how such structures operate, they said, “The HO of foreign banks provides shared management services such as business strategy guidelines, accounting, HR, Payroll, IT and legal support, to its Indian Branches. For some foreign banks, such services are provided by their regional hubs based in Singapore/Hong Kong. Common expenses are allocated among group entities using appropriate allocation keys.”They pointed out that Indian tax law already permits deduction of such costs, but within limits. “Section 44C of the Act allows a non-resident taxpayer (e.g. a foreign bank that operates in India through the branch office form of presence) to claim a tax deduction in India for HO expenditure incurred while computing its business income. The tax deduction is permitted to the extent of the lower of (i) the actual expenditure incurred, or (ii) 5 percent of the Adjusted Total Income (ATI) of the taxpayer,” they said.According to them, branch offices are often heavily reliant on their global headquarters, especially in the early years. “Generally, a Branch office has dependency on its HO in the initial years of setting up its business in the host country, as well as in subsequent years to implement the strategies of the HO and operational adaptabilities developed by the HO,” they noted.They also flagged practical challenges around documentation and assessments. “The burden of proof of the correct claim of HO expenditure is on the non-resident taxpayer, for which the non-resident taxpayer procures a certificate from an overseas Chartered Accountant (CA), which confirms the nature and quantum of HO expenditure,” they said, adding that, “The CBDT has not prescribed any guidance as regards what documentary evidence is to be maintained by the non-resident taxpayer, for claiming the aforesaid tax deduction under section 44C.”This lack of standardisation, they said, leads to disputes. “This often leads to non-resident taxpayers following different practices when it comes to providing documentary evidence for claiming the aforesaid tax deduction and obtaining such overseas CA certificates in different formats, which are sometimes challenged by the Indian Revenue authorities (IRA).”To address this, they urged the government to bring in clearer rules. “With a view to reducing tax litigation in India on this issue and providing tax certainty, it is important for the CBDT to issue clear guidance on the documentary evidence that can be maintained by non-resident taxpayers for claiming a tax deduction in India for HO expenditure, as well as a format of certificate that can be provided by the non-resident taxpayer,” they said.Among the specific measures suggested is a rule recognising overseas auditor certificates. “Firstly, a Rule should be introduced in the Income Tax Rules, 1962 (the IT Rules) that will provide that the IRA (including the TPOs) should accept a certificate to be issued by the overseas statutory auditor of a non-resident taxpayer as conclusive evidence to enable the taxpayer claim a tax deduction in India under section 44C of the Act, towards HO expenditure that is incurred by the taxpayer outside India,” they said. They also recommended that “the CBDT can prescribe the format of the certificate to be procured by the non-resident taxpayer.”They further proposed expanding the scope of eligible expenses in line with evolving business models. “The CBDT can consider issuing a clarification expanding the illustrative list of expenses that fall within the definition of ‘HO expenditure’ for the purposes of section 44C. The CBDT should consult with industry prior to finalising the aforesaid list, so as to get insights into the types of new-age expenses that can fall within the ambit of section 44C (e.g., technology-related expenses),” they said.They also called for a review of the long-standing deduction cap. “The existing cap of 5 percent of ATI was set in 1976 when section 44C was first introduced in the statute books. There has been a significant passage of time (i.e., nearly 50 years) since the setting of this limit,” they said. “It is time to re-examine the 5 percent tax deductibility cap… it is recommended that the overall cap prescribed in section 44C(a) be increased from the existing 5 percent of ATI to 10 percent of ATI, to keep pace with the expenditure patterns of modern businesses.”With cross-border banking operations becoming more integrated and technology-driven, the experts said the Budget presents an opportunity to reduce disputes and provide long-awaited clarity on HO expense deductions.