Why in the News?

The United States has enacted a 1% tax on certain outbound remittances under the One Big Beautiful Bill Act, raising concerns about its impact on India’s remittance inflows.

What’s in Today’s Article?

• US Remittance Tax (Introduction, Key Features, Exemptions, Implications, Broader Trends, etc.)

Introduction to the New US Remittance Tax

• A newly passed US legislation, the One Big Beautiful Bill Act (OBBBA), has introduced a 1% tax on certain outbound remittances, sparking concern among countries that rely heavily on money sent back by expatriates.
• The tax, effective from January 1, 2026, is expected to marginally affect India, the world’s largest recipient of remittances, primarily through higher costs rather than a significant decline in remittance volumes.

Key Features and Exemptions

• Originally proposed as a 5% tax, the remittance levy was later reduced to 1% after bipartisan negotiations. However, key exemptions in the Senate-passed version limit its reach:

• Applies only to physical modes of transfer like cash, money orders, and cashier’s checks.
• Bank account transfers or payments through US-issued debit/credit cards are exempt.
• Transfers under $15 are not taxed.
• US citizens sending remittances are not subject to the tax.

• These exclusions will mitigate the adverse impact for a large portion of Indian-origin remitters using digital channels.

Implications for India’s Remittance Economy

• According to the Centre for Global Development, India may lose just under $500 million in formal remittance inflows, second only to Mexico, which could lose over $1.5 billion.
• Although this is a small portion of the $124.3 billion India received in net remittances during 2024-25, the tax is a symbolic reminder of increasing policy barriers to international money flows.
• Moreover, remittances from the US account for nearly 27.7% of India’s total, approximately $32 billion in 2023-24.
• While the proportion of cash-based transfers is low, even a slight disruption can impact rural households relying on such inflows.
• Distributional and Timing Effects
  • According to economists, the impact will be frontloaded into the first three quarters of FY2025-26, as senders might advance transfers to avoid the tax.
  • However, the lower-than-expected rate (1%) means that the overall long-term impact will remain limited and primarily felt in transaction costs rather than volume reductions.

Broader Trends in Remittance Flows

• India’s remittance receipts have been growing steadily:

• Net remittances in FY2024-25: $124.31 billion (up 16%)
• Gross inflows: $132.07 billion (up 14%)
• US share of remittances: Grew from 22.9% in 2016-17 to 27.7% in 2023-24

• Notably, in FY2024-25, net remittances not only covered India’s entire trade deficit of $98.39 billion but also left a $26 billion surplus, underlining their macroeconomic significance.

Growing Costs of Cross-Border Transfers

• Even before this new tax, sending money to India has involved significant transaction costs. As per World Bank data, the average cost of sending $200 to India in Q4 2024 was 5.3%, compared to the global average of 6.6%.
• The tax could push these costs further up, particularly in channels involving multiple intermediaries or non-bank methods.
• Moreover, delays and fees from correspondent banking chains are an ongoing concern, making remittance infrastructure innovation all the more essential.

India’s Payment Infrastructure as a Cushion

• India has proactively worked on reducing frictions in cross-border payments:

• UPI-PayNow Link: Seamless money transfer between India and Singapore
• RBI participation in Project Nexus (by BIS): Aims to enable “cheaper, faster, more transparent” global transfers

• Such efforts will be critical in mitigating the impact of policy changes abroad and improving the ease of formal remittance channels for the Indian diaspora.