The Trump administration's proposed 5% tax on all remittances sent abroad is not likely to have a significant impact on the Indian economy, officials and economists said.
The exact impact will be known once the details of the tax are known. It may not have any significant impact if the 5% levy is allowed to be set off against tax liability.
"It will certainly put a strain on the Indian diaspora and will dampen the morale but the impact on the Indian economy and Indian Rupee may not be as significant," a senior official told ET.
According to the Global Trade Research Initiative (GTRI), the proposed US tax on remittances may weaken the Indian Rupee by Rs 1-1.5 per US dollar if the remittance shock plays out fully.
Finance ministry officials say this may set a precedence for other countries but it was premature to give a number at this point of time.
"The fine print of the law are unclear and while this may have an impact, people will not stop sending money back home due to the tax... but other countries may adopt similar moves," the official said.
The proposed levy on the remittance, which is a crucial lifeline for millions of families back home, has the potential to drain $1.75 billion from India's remittance kitty as the US remains the largest source of remittance for India.
"There will be a marginal impact on the flow of remittance and the current account deficit, and overall, it will not cause any concern for the rupee," said Madan Sabnavis, chief economist, Bank of Baroda.
"Not everyone will cut down the remittance back home, especially in case of sending to family and relatives, where they may pay the tax amount from their pocket. However, there may be some readjustment from the low income groups, but certainly the growth of remittance inflow may not happen like past years," Sabnavis added.
The US remains the largest source of foreign remittance for India which has doubled from $55.6 billion in 2010-11 to $118.7 billion in 2023-24. Out of this, approximately 28% or $32 billion came from the US alone, according to the Reserve Bank of India.
Official data suggest there are 4.5 million overseas Indians in the US, including about 3.2 million Persons of Indian Origin (PIOs).
"By exempting only US citizens and nationals making remittance through qualified remittance transfer provider, the proposal disproportionately affects millions of lawful immigrants including green card holders, work visa holders, and non-resident aliens, many of whom maintain ongoing financial obligations in their home countries," said Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Andersen LLP.
He added that clarity, however, was missing on the aspect whether the exemption is available to all those who have valid social security number or only to US citizens.
Experts say that it may affect investment in sectors like real estate, as NRIs remain a substantial chunk of the buyers in real estate in Bangaluru, Hyderabad and NCR.
According to a report by the realty consultant Anarock group, NRIs constitute a significant part of the overall sales in the markets. In any given quarter, at least 10-15 per cent of total sales are by NRIs.
"The reaction could be either to go through informal channels or to absorb the tax, resulting in the net remittance being 95% of the intended original transfer," Ranen Banerjee, partner and leader, economic advisory, PwC India.
He added that there could be fintech innovations as well that bring down the cost of transactions to partially offset the tax.
"The fine print on whether the remittance tax will be allowed to offset the overall tax liability of an individual in the US will also determine the actual behaviour of remitters," he added.
The US House of Representatives is likely to pass the bill by May 26, after which it would proceed to the Senate for final approval.
The exact impact will be known once the details of the tax are known. It may not have any significant impact if the 5% levy is allowed to be set off against tax liability.
"It will certainly put a strain on the Indian diaspora and will dampen the morale but the impact on the Indian economy and Indian Rupee may not be as significant," a senior official told ET.
According to the Global Trade Research Initiative (GTRI), the proposed US tax on remittances may weaken the Indian Rupee by Rs 1-1.5 per US dollar if the remittance shock plays out fully.
Finance ministry officials say this may set a precedence for other countries but it was premature to give a number at this point of time.
"The fine print of the law are unclear and while this may have an impact, people will not stop sending money back home due to the tax... but other countries may adopt similar moves," the official said.
The proposed levy on the remittance, which is a crucial lifeline for millions of families back home, has the potential to drain $1.75 billion from India's remittance kitty as the US remains the largest source of remittance for India.
"There will be a marginal impact on the flow of remittance and the current account deficit, and overall, it will not cause any concern for the rupee," said Madan Sabnavis, chief economist, Bank of Baroda.
"Not everyone will cut down the remittance back home, especially in case of sending to family and relatives, where they may pay the tax amount from their pocket. However, there may be some readjustment from the low income groups, but certainly the growth of remittance inflow may not happen like past years," Sabnavis added.
The US remains the largest source of foreign remittance for India which has doubled from $55.6 billion in 2010-11 to $118.7 billion in 2023-24. Out of this, approximately 28% or $32 billion came from the US alone, according to the Reserve Bank of India.
Official data suggest there are 4.5 million overseas Indians in the US, including about 3.2 million Persons of Indian Origin (PIOs).
"By exempting only US citizens and nationals making remittance through qualified remittance transfer provider, the proposal disproportionately affects millions of lawful immigrants including green card holders, work visa holders, and non-resident aliens, many of whom maintain ongoing financial obligations in their home countries," said Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Andersen LLP.
He added that clarity, however, was missing on the aspect whether the exemption is available to all those who have valid social security number or only to US citizens.
Experts say that it may affect investment in sectors like real estate, as NRIs remain a substantial chunk of the buyers in real estate in Bangaluru, Hyderabad and NCR.
According to a report by the realty consultant Anarock group, NRIs constitute a significant part of the overall sales in the markets. In any given quarter, at least 10-15 per cent of total sales are by NRIs.
"The reaction could be either to go through informal channels or to absorb the tax, resulting in the net remittance being 95% of the intended original transfer," Ranen Banerjee, partner and leader, economic advisory, PwC India.
He added that there could be fintech innovations as well that bring down the cost of transactions to partially offset the tax.
"The fine print on whether the remittance tax will be allowed to offset the overall tax liability of an individual in the US will also determine the actual behaviour of remitters," he added.
The US House of Representatives is likely to pass the bill by May 26, after which it would proceed to the Senate for final approval.
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