And it is no surprise that India is the world capital of remittances. In 2024, its diaspora remitted a record $129 billion home. This record inflow comes as the proposed U.S. tax on remittances threatens to stop future transfers from reaching their intended destination. The tax has been fixed at 3.5% of remittances sent abroad by foreign labor. This begs the question of how AI will affect existing financial support systems for migrants, particularly in developing countries such as India.
Sure enough, since 2008, India has worn that crown proudly, as the world’s biggest remittance recipient. This accomplishment underscores just how critical these funds are to jumpstarting the Indian economy. In doing so, India has by leaps and bounds increased its share of the global remittance pie. It’s risen from 11% in 2001 to a remarkable 14% in 2024. This trend illustrates our growing reliance on fiscal handouts. The Indian household’s proclivity to consume, save, and invest this wealth into asset creation— housing, gold, small businesses, etc.
We take a closer look at why experts are worried about the proposal’s potential fallout. A new study finds that the tax could reduce formal remittance flows by over half. As a result, Mexico stands to lose more than $2.6 billion annually. India, China and Vietnam will no doubt run into these same hurdles. Many more Latin American countries — like Guatemala, the Dominican Republic, and El Salvador — will soon find themselves facing these challenges.
India’s central bank, the Reserve Bank of India, continues to express bullish sentiments about the behavior of remittances. They estimate that these dollars could skyrocket up to $160 billion by 2029. In this light, between 2000 and 2018, remittances have played an important role by consistently adding approximately 3% to India’s GDP. This underscores their important role in economic stabilization. Experts warn that a reduction of 10-15% in remittances could cost India between $12 billion and $18 billion annually.
The United States ranks first in the world for remittance outflows. Its share has jumped even more dramatically, going from 23.4% in 2020–21 to almost 28% in 2023–24. A staggering 78% of Indian migrants in the U.S. flourish in some of the highest-earning sectors. They lead in professions such as remediation industry, technology, economy, social system, and the environment. This expat demographic is essential to India’s growing remittance inflow.
Talking about the proposed tax’s implications, Dilip Ratha, a leading expert on migration and remittances made the following statement. He stated:
“A 3.5% tax is unlikely to deter these remittances. After all the main motivation for migration – migrants trying to cross oceans and rivers and mountains – is to send money home to help helpless family members.” – Dilip Ratha
Ratha pointed out the broad scope of the tax’s applicability:
“The tax applies to all non-citizens and even embassy and UN/World Bank staff. But those who pay taxes can claim a tax credit. Thus, the remittance tax would apply only to those migrants who do not pay taxes. That would mostly include unauthorized migrants (and diplomats).” – Dilip Ratha
This tax comes with costs that extend far past the dollar amount. It raises crucial questions, both about who is moving this way and why. Ratha posed a thought-provoking inquiry:
“Will the proposed tax deter unauthorized immigration to the US? Will it encourage unauthorized migrants to return home?” – Dilip Ratha
India’s international migrant population is surging, growing from 6.6 million in 1990 to a projected 18.5 million in 2024. This burgeoning trend will continue to secure remittances as a lifeline for many households. In 2023, Indian citizens residing abroad transferred a whopping $119 billion back home. This assistance financed the equivalent of one-half of India’s goods trade deficit and even surpassed foreign direct investment.