Why a proposed remittance tax by US might harm India

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Tucked deep in Donald Trump's sprawling "One, Huge, Stunning Invoice Act" is a clause that might quietly take billions from cash despatched overseas.

It proposes a 3.5% tax on remittances despatched overseas by overseas employees, together with inexperienced card holders and momentary visa employees equivalent to these on H-1B visas. For India - the world's prime remittance recipient - the implications are critical, say specialists. Different main recipients embody Mexico, China, the Philippines, France, Pakistan and Bangladesh.

In 2023, Indians overseas despatched dwelling $119bn (£88bn) - sufficient to finance half of India's items commerce deficit and outpace overseas direct funding, in response to a paper by Reserve Financial institution of India (RBI) economists. Of this, the most important share got here from the US. For thousands and thousands of migrants, that features the cash wired to cowl a mum or dad's medication, a nephew's tuition or a mortgage again dwelling.

A blunt levy on remittances might skim billions from migrant employees, a lot of whom already pay taxes in America. The possible consequence? An increase in casual, untraceable money transfers and a dent in India's most steady supply of exterior financing.

India has remained the highest recipient of remittances since 2008, with its share rising from 11% in 2001 to 14% in 2024, in response to World Financial institution. India’s central financial institution says that remittances are anticipated to remain robust, reaching an estimated $160bn by 2029. The nation's remittances have persistently hovered round 3% of GDP since 2000.

India's worldwide migrant inhabitants grew from 6.6 million in 1990 to 18.5 million in 2024, with its international share rising from 4.3% to over 6%. Whereas the Gulf nonetheless hosts almost half of all Indian migrants, expert migration to superior economies - particularly the US - has elevated considerably, pushed by India's international IT footprint.

The US stays the highest supply of remittances worldwide, with its share rising from 23.4% in 2020–21 to just about 28% in 2023–24, pushed by a powerful post-pandemic job restoration and a 6.3% rise in foreign-born employees in 2022. Notably, 78% of Indian migrants within the US work in high-earning sectors equivalent to administration, enterprise, science, and the humanities.

Remittance prices - pushed by charges and foreign money conversion - have lengthy been a world coverage concern as a consequence of their influence on households. Whereas international averages of the prices stay above targets, India stands out as some of the reasonably priced locations, reflecting the rise of digital channels and heightened market competitors.

<img sizes="(min-width: 1280px) 50vw, (min-width: 1008px) 66vw, 96vw" srcset="https://ichef.bbci.co.uk/news/240/cpsprodpb/892f/live/83364540-3f9e-11f0-aefb-5bdcf7b5706c.jpg.webp 240w,https://ichef.bbci.co.uk/news/320/cpsprodpb/892f/live/83364540-3f9e-11f0-aefb-5bdcf7b5706c.jpg.webp 320w,https://ichef.bbci.co.uk/news/480/cpsprodpb/892f/live/83364540-3f9e-11f0-aefb-5bdcf7b5706c.jpg.webp 480w,https://ichef.bbci.co.uk/news/640/cpsprodpb/892f/live/83364540-3f9e-11f0-aefb-5bdcf7b5706c.jpg.webp 640w,https://ichef.bbci.co.uk/news/800/cpsprodpb/892f/live/83364540-3f9e-11f0-aefb-5bdcf7b5706c.jpg.webp 800w,https://ichef.bbci.co.uk/news/1024/cpsprodpb/892f/live/83364540-3f9e-11f0-aefb-5bdcf7b5706c.jpg.webp 1024w,https://ichef.bbci.co.uk/news/1536/cpsprodpb/892f/live/83364540-3f9e-11f0-aefb-5bdcf7b5706c.jpg.webp 1536w" src="https://ichef.bbci.co.uk/news/480/cpsprodpb/892f/live/83364540-3f9e-11f0-aefb-5bdcf7b5706c.jpg.webp" loading="lazy" alt="AFP via Getty Image A worker holding US dollar (R) and Indian rupee currency notes poses for a photograph at a money exchange outlet in New Delhi on April 3, 2025. US President Donald Trump ignited a potentially ruinous global trade war on April 2 as he slapped 10 percent tariffs on imports from around the world and harsh extra levies on key trading partners. (Photo by Arun SANKAR / AFP) (Photo by ARUN SANKAR/AFP via Getty Images)" class="sc-d1200759-0 dvfjxj"/> AFP through Getty Picture India topped the worldwide remittance charts with $129bn despatched dwelling in 2024

A ten-15% drop in remittances might price India $12-18bn a yr, tightening greenback provide and placing strain on the rupee, in response to Ajay Srivastava of Delhi-based suppose tank International Commerce Analysis Initiative (GTRI). He reckons the central financial institution might should step in additional typically to stabilise the foreign money.

The larger blow would land on households in states equivalent to Kerala, Uttar Pradesh and Bihar, the place remittances fund necessities like training, healthcare and housing. The tax might "hit family consumption onerous" even because the Indian financial system grapples with international uncertainty and inflation, Mr Srivastava says in a notice.

The remittance tax might squeeze Indian family budgets, dampen consumption and funding, and undermine one in all India's steadiest sources of overseas change, warns a quick by the Delhi-based Centre for WTO Research. Maharashtra, adopted by Kerala and Tamil Nadu, continues to be among the many dominant recipient states.

Remittances in India are largely used for family consumption, financial savings and funding in belongings like housing, gold and small companies. in response to a coverage transient by the suppose tank's Pritam Banerjee, Saptarshee Mandal and Divyansh Dua.

A drop in inflows might shrink home financial savings and cut back funding in each monetary and bodily belongings. When remittance inflows decline, households are prone to "prioritise consumption wants (e.g. meals, healthcare, and training) over financial savings and funding", the transient says.

<img sizes="(min-width: 1280px) 50vw, (min-width: 1008px) 66vw, 96vw" srcset="https://ichef.bbci.co.uk/news/240/cpsprodpb/b093/live/10a4c4e0-41c2-11f0-b142-e9bdc136ef30.jpg.webp 240w,https://ichef.bbci.co.uk/news/320/cpsprodpb/b093/live/10a4c4e0-41c2-11f0-b142-e9bdc136ef30.jpg.webp 320w,https://ichef.bbci.co.uk/news/480/cpsprodpb/b093/live/10a4c4e0-41c2-11f0-b142-e9bdc136ef30.jpg.webp 480w,https://ichef.bbci.co.uk/news/640/cpsprodpb/b093/live/10a4c4e0-41c2-11f0-b142-e9bdc136ef30.jpg.webp 640w,https://ichef.bbci.co.uk/news/800/cpsprodpb/b093/live/10a4c4e0-41c2-11f0-b142-e9bdc136ef30.jpg.webp 800w,https://ichef.bbci.co.uk/news/1024/cpsprodpb/b093/live/10a4c4e0-41c2-11f0-b142-e9bdc136ef30.jpg.webp 1024w,https://ichef.bbci.co.uk/news/1536/cpsprodpb/b093/live/10a4c4e0-41c2-11f0-b142-e9bdc136ef30.jpg.webp 1536w" src="https://ichef.bbci.co.uk/news/480/cpsprodpb/b093/live/10a4c4e0-41c2-11f0-b142-e9bdc136ef30.jpg.webp" loading="lazy" alt="Getty Images A wall with a money change board and a man walking past. Only his legs are seen. " class="sc-d1200759-0 dvfjxj"/> Getty Pictures A ten-15% drop in remittances might price India $12-18bn a yr, say specialists

A research by Middle for International Growth, a Washington-based suppose tank, suggests the proposed tax might sharply lower formal transfers, with Mexico going through the most important hit - over $2.6bn yearly. Different main losers embody India, China, Vietnam and several other Latin American nations like Guatemala, the Dominican Republic and El Salvador.

To make certain, there's nonetheless some confusion surrounding the tax, and last approval is pending Senate motion and the President's signature.

"The tax applies to all non-citizens and even embassy and UN/World Financial institution workers. However those that pay taxes can declare a tax credit score. Thus, the remittance tax would apply solely to these migrants who don't pay taxes. That will largely embody unauthorised migrants (and diplomats)," Dilip Ratha, the World Financial institution lead economist for migration and remittances, advised the BBC.

Dr Ratha wrote in a notice on LinkedIn that migrants would attempt to lower remittance prices by turning to casual strategies - hand-carrying money, sending cash by way of pals, couriers, bus drivers or airline workers, arranging native foreign money payouts through pals within the US, or utilizing hawala, hundi and cryptocurrencies.

"Will the proposed tax deter unauthorised immigration to the US? Will it encourage unauthorised migrants to return dwelling?" wonders Dr Ratha.

Not fairly, he says. A minimal wage job within the US earns over $24,000 a yr - roughly 4 to 30 instances greater than in lots of growing international locations. Migrants sometimes ship dwelling between $1,800 and $48,000 yearly, estimates Dr Ratha.

"A 3.5% tax is unlikely to discourage these remittances. In any case the principle motivation for migration - migrants making an attempt to cross oceans and rivers and mountains - is to ship cash dwelling to assist helpless members of the family."