US House Passes Major Tax Bill with Impact on Remittances
On Thursday, the US House of Representatives approved a significant tax and spending bill known as the ‘One, Big, Beautiful Bill’ (OBBB). This legislation is now heading to the Senate for further consideration, where it could soon become law.
One aspect of OBBB that raises particular concern for India involves a new excise tax on money sent from the US to other countries by non-citizens and foreign nationals. Initially proposed at 5%, this tax has now been adjusted to 3.5%. With around 5.4 million Indians living in the US, this community represents roughly 1.6% of the American population and is among the most affluent non-White groups in the country.
Indian Americans often send money back home to support their families and invest in various ventures. In fact, remittances from non-resident Indians (NRIs) contribute significantly to the Indian economy, amounting to over $129 billion, or 3% of the country’s GDP. The US is the largest source of these remittances, accounting for nearly 28% in the current fiscal year, far surpassing the UAE at 19.2%. Remittances serve as the second-largest inflow of funds into India, following service exports, and they provide a relatively stable source of financial support, especially during economic uncertainty.
If OBBB is enacted, it could impact the approximately $1.6 billion sent home by expatriate Indians. This includes NRIs, H-1B visa holders, international students, and anyone who is not a US citizen, including green card holders.
Many Indian states offer various incentives to NRIs, encouraging them to establish startups or small businesses, particularly in smaller cities. Some may reconsider their plans for investment in the wake of the remittance tax, with options such as setting up businesses abroad or using different methods to send money home to avoid the tax.
There is concern that some may turn to informal channels like hawala networks or cryptocurrency transactions to bypass the tax. These alternatives could harm financial transparency and disrupt legitimate banking systems.
Additionally, many NRIs look to invest in real estate in India, but the new tax might slow down these investments. Properties in preferred areas may see less interest, particularly in states like Kerala and Gujarat.
The proposed remittance tax raises several issues regarding fairness and enforcement. Unlike income tax, which can often be deducted, this excise tax would not be deductible in either the US or India. As a result, NRIs would face additional tax burdens without the possibility of rebates, contrasting sharply with India’s taxation system, which allows for adjustments on remittances above a certain amount.
Indian Americans not only contribute financially but also play a vital emotional role in supporting their families. Imposing taxes on their remittances could lead to feelings of alienation and reduce their willingness to invest in homes or retire in India. It might also decrease their involvement in community service or development projects, as the financial and emotional ties begin to weaken.
Instead of discouraging remittances, it would be more beneficial for the US government to consider incentives that promote formal money transfers, such as investment-linked tax credits or tax thresholds for higher remittance amounts.
The writer is a former executive director for India at the World Bank and past chairman of CCI.
