The Major Concern is the Nuisance Value

Analysis of Potential US Remittance Tax on India’s Economy

While the US might initially benefit from proposed protectionist measures, it risks undermining its global leadership in the long run. India, on the other hand, should prioritize tariff negotiations to mitigate potential impacts.

Sebastian Morris explains that the proposed 3.5% tax on remittances by the US is expected to reduce inflows to India by around 10%. The real concern lies in the complications it might cause in cross-border taxation, possibly resulting in double taxation.

Significance of Remittances in India’s GDP

In 2024-25, India’s GDP was approximately $4,187 billion, with remittances accounting for 3.1% of GDP. When considering the expenditure multiplier, remittances indirectly contribute another 3.1%, making up a significant 7.2% of GDP from the demand side. Remittances play a crucial role in balancing deficiencies in the goods side of the economy through factors like skilled labor availability.

The dynamism of the Indian economy is largely due to remittances and service exports, which stimulate demand and drive growth in sectors like ITES. However, the potential US tax on remittances could disrupt this balance.

Potential Impact on India’s Current Account

The Reserve Bank of India estimated total remittances for 2023-24 to be $118.7 billion, with about 28% originating from the US. A proposed 3.5% tax on outward remittances by the US could reduce inflows to India by approximately 10%, equating to a $4.7 billion reduction.

Aside from the direct impact on remittances, the tax could complicate cross-border taxation, leading to double taxation issues and potentially affecting self-remittances. This could drive NRIs to divert investments to the US, further impacting India’s economy.

Longer-Term Impacts on the US

While the US may experience short to medium-term gains from retaining funds, the long-term negative impacts could be significant. The US’s global leadership as a capitalist powerhouse could be at risk if protectionist measures are intensified, undermining its role in global trade and economics.

Instead of retaliatory measures, India should focus on negotiating tariff agreements with the US to counter potential tax impacts. By prioritizing trade cooperation and reducing reliance on remittances, India can strengthen its economy in the long run.

As demonstrated by advanced east Asian countries like Korea, Taiwan, China, and Singapore, reducing dependence on remittances through strategic economic policies can pave the way for sustained growth and development.