India has consistently held its position as the world's leading recipient of remittances, a trend that has solidified since 2008. In 2024, India's share of global remittances rose to 14%, a significant increase from 11% in 2001, according to the World Bank. The Reserve Bank of India (RBI) anticipates this strong inflow to continue, projecting remittances to reach an estimated $160 billion by 2029. For years, these inflows have consistently hovered around 3% of India's GDP, highlighting their crucial role in the nation's economy.
However, a potential challenge looms on the horizon. A proposed tax by the former U.S. President Donald Trump, could significantly impact these vital financial flows. The proposal, embedded within Trump's "One, Big, Beautiful Bill Act," suggests a 3.5% tax on remittances sent abroad by foreign workers, including green card holders and those on temporary visas like the H-1B. Experts warn that this levy could have serious implications for India, potentially siphoning billions of dollars from the money its diaspora sends home.
In 2023, Indians working abroad remitted $119 billion, an amount that not only financed half of India's goods trade deficit but also surpassed foreign direct investment. The United States is the top contributor to these remittances, accounting for nearly 28% in 2023-24, a rise from 23.4% in 2020-21. This increase was fueled by a robust post-pandemic job recovery and a rise in foreign-born workers. A 3.5% tax could translate into a substantial financial burden for these workers, many of whom already pay taxes in the U.S.
The potential consequences of this tax extend beyond individual financial strain. A drop of 10-15% in remittances could cost India $12-18 billion annually, according to Ajay Srivastava of the Global Trade Research Initiative (GTRI). This could tighten the dollar supply, putting downward pressure on the rupee and potentially requiring increased intervention by the RBI to stabilize the currency.
The impact would be felt most acutely by households in states like Kerala, Uttar Pradesh, and Bihar, where remittances are essential for covering expenses such as education, healthcare, and housing. A tax-induced reduction in remittances could significantly curtail household consumption, especially as the Indian economy contends with global uncertainty and inflation.
Some experts believe the tax could also lead to unintended consequences, such as a rise in informal, untraceable cash transfers, thereby undermining a stable source of external financing for India. Others point out that a 3.5% tax is unlikely to deter remittances significantly, as the primary motivation for migration remains the desire to support family members back home.
The changing landscape of remittance sources could offer some mitigation. While the U.S. remains the largest single source, other countries like the United Kingdom, Singapore, and Canada are increasing their contributions. This diversification could cushion the impact of any potential decline in remittances from the U.S.
The RBI is actively monitoring the situation and is reviewing its Liberalised Remittance Scheme, which saw $30 billion in outflows in FY25, to promote rupee internationalization. This review aims to streamline regulations, simplify compliance, and expand permitted transactions. The central bank is also working to align foreign exchange rules with evolving business practices, enhance financial sector resilience, and curb the mis-selling of financial products.
While the proposed remittance tax poses a threat, India's strong remittance inflows, coupled with diversification efforts and proactive measures by the RBI, may help to mitigate the potential blow.
