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A proposed 5 per cent tax on foreign remittances sent by non-US citizens has sparked concern in India, with experts warning of far-reaching consequences on household finances and foreign currency inflows.

The measure, introduced in the US House of Representatives on May 12 as part of a broader legislative effort titled ‘The One Big Beautiful Bill’, specifically targets money transfers made by non-citizens, including green card holders and individuals on temporary visas such as H-1B or H-2A. US citizens would be exempt from this levy, reported PTI.

According to the Global Trade Research Initiative (GTRI), the implications for India could be serious. The country received remittances worth $120 billion in 2023-24, with nearly 28 per cent of that total coming from the United States. Should the tax become law, the cost of sending money back home could increase sharply for millions of Indian workers abroad.

Potential Shortfall and Impact on the Rupee

Ajay Srivastava, founder of GTRI, estimated that the proposed tax could lead to a 10-15 per cent decline in remittance volumes, resulting in a shortfall of $12-18 billion annually for India. “The loss would tighten the supply of US dollars in India's foreign exchange market, putting modest depreciation pressure on the rupee,” he noted.

This reduced inflow could force the Reserve Bank of India to intervene more often in currency markets to prevent volatility. Srivastava warned that, in a worst-case scenario, the rupee could depreciate by Rs 1 to 1.5 per US dollar due to the shock caused by declining remittances.

The potential disruption of foreign exchange inflows could also dampen consumer demand, especially in states like Kerala, Uttar Pradesh, and Bihar, where millions of families depend on money sent from abroad for essential needs such as education, healthcare, and housing.

Broader Economic Ramifications and Global Context

Beyond its domestic impact, the proposed US measure could interfere with global financial flows. “By taxing the global capital flow,” Srivastava said, “the US could disrupt a key channel of global development financing, reduce household income in poorer nations, and weaken demand in economies already grappling with inequality and instability.”

India has been advocating at the World Trade Organisation (WTO) for reducing the cost of cross-border remittance transfers. The new proposal by the US is viewed as being at odds with that objective, potentially raising the cost for millions of families and weakening one of the vital sources of financial support for developing countries.

As India monitors developments in Washington, the broader concern remains that such taxation policies could set a precedent, challenging the stability of global capital flows and putting pressure on emerging economies that rely on them for domestic consumption and macroeconomic stability.