Experts warn that the proposed tax in Donald Trump's "One, Big, Beautiful Bill Act" could strain the Indian economy by reducing vital remittances, which reached $119 billion in 2023.
India's Remittances at Risk Due to Proposed US Tax on Transfers
India's Remittances at Risk Due to Proposed US Tax on Transfers
A proposed 3.5% tax on remittances could significantly impact India's economy, which relies heavily on foreign worker transfers.
Tucked within Donald Trump's expansive "One, Big, Beautiful Bill Act" lies a contentious proposal that threatens to siphon billions of dollars from remittances sent abroad by foreign workers. This initiative suggests imposing a 3.5% tax on the money transferred internationally, affecting a variety of individuals including green card holders and temporary visa holders, particularly those reliant on H-1B visas. For India—acknowledged as the world's leading remittance recipient—the consequences of such a tax are expected to be profound, according to financial analysts and economic experts.
India has firmly held its position as the foremost beneficiary of remittances since 2008, with its share of the global total surging from 11% in 2001 to an estimated 14% in 2024, as reported by the World Bank. In 2023, $119 billion was remitted to India, which the Reserve Bank of India highlighted as crucial for bridging approximately half of the country's goods trade deficit. The remittance flows enable families to afford essentials like healthcare and education, and they significantly contribute to the nation's economy by outpacing foreign direct investment.
Should the tax materialize, it could spark a significant shift in the way remittances are navigated. Many migrant workers already face taxation in their host countries, and the additional levy could lead to increased engagement in informal transfer methods that evade scrutiny, thereby hampering India’s most reliable source of external financing.
Economic analysts like Ajay Srivastava from the Delhi-based Global Trade Research Initiative estimate that a 10-15% reduction in remittances could result in an annual loss of $12-18 billion, potentially tightening the dollar supply and exerting pressure on India's currency, the rupee. The brunt of the impact would likely fall hardest on households in states such as Kerala, Uttar Pradesh, and Bihar, where remittances are inextricably woven into the fabric of daily life and necessary expenditures.
Data indicates that remittances account for approximately 3% of India's GDP, and their consistent inflow supports critical household consumption patterns, savings, and investments in assets. If this financial lifeline were to dwindle, domestic savings might shrink, and migration-induced investment could stall. A policy brief highlights that as remittance inflows decrease, families may prioritize urgent consumption—food, healthcare, and education—over investments or savings.
The ramifications would extend beyond the immediate financial strain, possibly dampening broader economic growth at a time when India grapples with a fluctuating global economic landscape. The proposed tax is anticipated to primarily hit those who do not pay taxes and could spur a retreat to unregulated transfer channels, risking an uptick in unauthorized methods like cash hand-carrying and informal networks.
While it remains uncertain whether the tax will be enacted, with its fate pending Senate approval and Presidential endorsement, some experts urge that even a nominal tax could deter the flow of remittances. Yet, despite the possible cost implications, the enduring determination of migrants to support their families may counterbalance the tax's disincentive effect. As the discourse unfolds, the implications of such policy decisions on international migration and remittance flows will remain a critical aspect to monitor in the coming years.
