By Sebastian Morris
The proposed 3.5% tax by the US on remittances can be expected to reduce inflows to India only by around 10%. The bigger problem is its nuisance value as it will complicate cross-border tax and may even lead to double taxation, explains Sebastian Morris.
Significance of remittances
INDIA’S GDP IN 2024-25 was approximately $4,187 billion, with remittances at 3.1% of GDP —significant but not dominant. With an expenditure multiplier of 2, remittances indirectly contribute another 3.1%, totalling about 7.2% of GDP when considered from the demand side. Recognising that a large part of our export of services (which is positive on the current account to the extent of nearly 4.5% of GDP) have an element of the factor side (being driven inter alia by readily available skilled labour at low costs), the role of remittances and services in making up for the deficiency on the goods side (the productive engine) is very important.
A large part of the dynamism of the economy is due to remittances and service exports and the demand multiplier resulting from the “income” accruing to ordinary employees. If the direct and second level employment due to services export (largely ITES) and remittance spending is excluded, then there is little dynamism in the labour and construction markets in India.
Impact of a potential US tax on inflows
THE RBI ESTIMATED the total remittances in 2023-24 to be $118.7 billion, and about $32 billion or 28% to be from the US. President Donald Trump’s One Big Beautiful Bill aims to levy a 3.5% tax on outward remittances made by non-US citizens, including non-immigrant visa holders (for instance, H-1B) and Green Card holders. Since only non-citizens would be affected, perhaps all of the $32 billion would not be involved, only perhaps $28 billion, since US citizens do remit to India. At 3.5%, this is likely to be just under a billion. The immediate impact on the current account is about 0.04% of GDP or even less, assuming that remitters pay up the tax and do not defer or cancel the intended remittances.
However, there is the possibility that self-remitances could be affected, and NRIs could divert their investments to US mutual funds and US stocks rather than investing as Indians in India.
A 3.5% tax can be expected to reduce the flow by around 10%. At 10%, the hit to inflows on account of the tax and the reduction can be about $4.7 billion, which is just about 0.1% of GDP and growth may be reduced at worst by 0.2% over the year. Most probably by less than this estimate since some other channels (remittances from overseas citizens of India) could increase.
Cross-border tax may go for a toss
THE BIGGER PROBLEM is that the tax would complicate cross-border taxation raising double taxation issues, and the nuisance value of the same would be large. Young employees in the US sending back money to pay off their loans would be quite significantly affected, since their remittances are likely to be a large part of their earnings in the US. But then student loans would decline sharply since Indians would find the value of a US education declining with all the proposed restrictions on working and waiting for work in the US, which far outweigh the impact of tax on remittances.
Longer-term negative impact on the US
The US ITSELF would see short to medium gains, as about 15% of the funds ($ 30 billion) are retained and either invested or spent. This is the maximum positive impact. There are, of course, longer-term negative impacts. The US is the leading capitalist country that upholds global capitalism. It is the only country with net positive inflows on the technology trade. Its global leadership is based on technology, military, its economy, freedoms, its universities, and one result of these is that its currency is the global currency. This necessitates that the US runs current account deficits to create an increasing stock of dollars outside the US – i.e., it is the principal source of liquidity. So, Trump, by starting with the “need to eliminate its current account deficit”, is working at a purpose that contradicts with “the US being the leader”. So the absurd approach to tariffs, if seriously pursued, along with taxes everywhere he sees a deficit, can only undermine the US’s leadership.
Best for India to focus on tariff negotiations
INDIA COULD, OF course, consider a similar tax on outward remittances to the US by all persons from India including Indian citizens, and especially US citizens who hold property in India. But it is far better to work quietly in the background to get the US to reduce these taxes, or eliminate the same.
The expected impact can easily be countered by an increase in exports. So the tariff negotiations are far more important. After all, in the medium to long term the country can only gain in liberalised trade with a richer country. Given the country’s emerging character, India can and should reduce its dependence on remittances, as the now advanced east Asian countries – Korea, Taiwan, China, Singapore show. Indeed the “Dutch disease” aspect of the remittances is what we need to overcome via more aggressive exchange rate policies that make our exports more dynamic.
The writer is professor and chair, Centre for Public Policy and Governance, at Goa Institute of Management