Why a proposed remittance tax by US could hurt India

Nestled at the bottom of Donald Trump “A great, beautiful act of bill” is a clause that could quietly take billions of money sent abroad.

He Offers a 3.5% tax on funding of funds Sent abroad by foreign workers, including holders of green cards and temporary visa workers such as those of H-1B visas. For India – the best worldwide beneficiary of funding – the implications are serious, say experts. The other major recipients include Mexico, China, the Philippines, France, Pakistan and Bangladesh.

In 2023, Indians abroad sent to the house 119 billion dollars (88 billion pounds sterling) – Enough to finance half of the commercial deficit of India goods and exceed foreign direct investments, according to a paper by Reserve Bank of India (RBI) economists. The biggest part came from the United States. For millions of migrants, this includes wired money to cover a parent’s medicines, tuition fees of a nephew or a mortgage at home.

An blurred levy from sending funds could browse billions of migrant workers, many of whom are already paying taxes in America. The probable result? An increase in transfers in informal and untraceable cash and a bump in the most stable source of external financing in India.

India has remained the first beneficiary of funding since 2008, with its share from 11% in 2001 to 14% in 2024, according to the World Bank. The Central Bank of India claims that funding of funds should remain strong, reaching around $ 160 billion by 2029. The country’s funding of funds have always oscillated about 3% of GDP since 2000.

The population of international migrants from India increased from 6.6 million in 1990 to 18.5 million in 2024, its world share from 4.3% to more than 6%. While the Gulf still welcomes almost half of all Indian migrants, the qualified migration to advanced economies – especially the United States – has increased considerably, driven by the global imprint of India.

The United States remains the main source of sending funds worldwide, with its share from 23.4% in 2020-20121 to almost 28% in 2023-24, driven by a strong post-country recovery and an increase of 6.3% of workers linked abroad in 2022. In particular 78% of Indian migrants in the United States in high sectors such as management, companies, science and arts.

Payment costs – pulled by costs and conversion of currencies – have long been a global political concern because of their impact on families. While the global costs of costs remain above targets, India is distinguished as one of the most affordable destinations, reflecting the rise of digital channels and increased market competition.

A decrease of 10 to 15% of funds could cost India $ 12 to $ 18 billion a year, tighten supply to dollars and exert pressure on Roupie, according to Ajay Srivastava of the Research Initiative on World Trade in Think Tank, based in Delhi (GTRI). He believes that the central bank may have to intervene more often to stabilize the currency.

The biggest blow would land on households in states such as Kerala, Uttar Pradesh and Bihar, where funds finance essential elements such as education, health care and housing. The tax could “hit the consumption of households hard” while the Indian economy is struggling with global uncertainty and uncertainty, says Mr. Srivastava in a note.

The tax on shipping funds could repress Indian household budgets, mitigate consumption and investment, and undermine one of the most stable sources of exchange of exchange, a brief by the OMC study center based in Delhi. The Maharashtra, followed by Kerala and Tamil Nadu, continues to be among the dominant beneficiary states.

Shipments of funds to India are widely used for consumption, savings and investment of households in assets such as housing, gold and small businesses. According to a political memory of the Think Tank Pritam Banerjee, Saptarshee Mandal and Divyansh Dua.

A drop in entries could reduce internal savings and reduce investments in financial and physical assets. When payment entries decrease, households are likely to “prioritize consumption needs (for example, food, health care and education) compared to economies and investments”, says the memory.

A study By Center for Global Development, a Washington -based reflection group suggests that the proposed tax could greatly reduce formal transfers, Mexico being faced with the greatest success – more than 2.6 billion dollars per year. The other large losers include India, China, Vietnam and several Latin American nations such as Guatemala, the Dominican Republic and Salvador.

Admittedly, there is still a certain confusion surrounding the tax, and the final approval is the action of the waiting Senate and the signature of the president.

“The tax applies to all non-citizens and even in the staff of the Embassy and the UN / the World Bank. But those who pay taxes can request a tax credit. Thus, the tax on versions would only apply to migrants who do not pay taxes. This would mainly include the economy of migration and unauthorized diplomats,” said Dilip Ratha, saved for migration and versions, said BBC.

Dr. Ratha wrote in a note on LinkedIn that migrants would try to reduce payment costs by turning to informal – cash methods that carry hands, sending money by friends, couriers, bus drivers or airline staff, organizing local money payments through friends in the United States, or using hala, checks and cryptocurrencies.

“Will the proposed tax dissuade unauthorized immigration to the United States? Will it encourage unauthorized migrants to go home?” Dr. Ratha wonders.

Not quite, he said. In the United States, a job at the minimum wage earns more than $ 24,000 per year – approximately four to 30 times more than in many developing countries. Migrants generally return to them between $ 1,800 and $ 48,000 per year, Dr. Ratha estimates.

“A 3.5% tax is unlikely to dissuade these funds. After all the main motivation for migration – migrants trying to cross the oceans and rivers and mountains – is to send money home to help helpless family members.”