Trump’s remittance tax is unjust—to both Indian immigrants and US economy

India could consider countermeasures under the principle of reciprocity and tax outward remittances by US companies and foreign institutional investors that invest in Indian stock markets.

Representational image of Indian Americans | Pew Research Center

US President Donald Trump recently announced a 5 per cent levy on outward remittances by foreign nationals, including green card holders and those with H1B visas. Although it was later revised to 3.5 per cent, the plan has generated widespread concern, especially among Indian immigrants in the US, who form a significant part of the foreign national workforce.

According to data published by the Reserve Bank of India (RBI), India received $32 billion in remittances from the US in the financial year 2023-24, out of a total of $129 billion. Even if the level of remittances remains the same in the coming years, the proposed tax would effectively reduce remittances to Indian households and the Indian economy by over a billion dollars.

If implemented, the proposal could have long-term economic and diplomatic consequences not just for India, but also for the United States. A closer examination reveals that there is no solid economic rationale for such a move, nor is there any globally accepted practice for such a levy.

Remittance tax—illogical, unprecedented

The Trump administration’s stated aim is to collect more revenue for the US government and prevent money from flowing out to foreign countries. However, this approach is short-sighted and potentially harmful to the United States itself. First of all, remittances by migrants are not business profits; they are personal transfers. When these funds are already taxed by federal and state governments in the US, imposing a second layer of taxation on them is both unjust and economically regressive.

Moreover, such a tax is unprecedented. Globally, there are virtually no examples of governments taxing money sent abroad by legitimate foreign workers. Canada, the UK, Australia, and the Gulf countries impose no such taxes. In fact, international institutions such as the World Bank and the International Monetary Fund (IMF) encourage the free flow of remittances to reduce poverty and promote economic stability in developing countries.

Potential impact on India

It is true that the move could discourage remittances from the United States to India, which would not only hurt millions of Indian families who depend on these funds but also negatively impact India’s foreign exchange reserves. But on the other hand, a tax on remittances would also send a negative message to skilled immigrants — particularly those from India — who play a vital role in the United States economy.

Indians form one of the most successful and productive immigrant communities in the US. According to a joint report by Indiaspora and Boston Consulting Group (BCG), people of Indian origin, despite accounting for only 1.5 per cent of the US population, contribute 5 to 6 per cent of total income taxes — an estimated $250-300 billion annually. This reflects not only the high incomes of Indians but also their strong work ethic, educational excellence, and entrepreneurial spirit. It is clear that part of the aid the US government provides to poor American families is financed by the additional revenue earned from people of Indian origin.

Let’s take a closer look: among the 648 unicorn companies in the US, over 11 per cent — that is, 72 companies — were founded by Indian-origin entrepreneurs. Furthermore, 60 percent of hotels in the US are owned by people of Indian origin, generating close to $700 billion in hospitality revenue. These statistics illustrate the deep and far-reaching contributions of Indian nationals and Indian Americans to the US economy. Imposing policies that could drive them away would be a self-defeating strategy.

Immigrant-friendly policies benefit the US

The US has historically benefited from welcoming immigrants, particularly skilled professionals from countries like India. The tech boom in Silicon Valley, for instance, was driven by the innovations of immigrants. Companies like Google, Microsoft, and Adobe have been led by Indian-origin CEOs — Sundar Pichai, Satya Nadella, and Shantanu Narayen, respectively. Their leadership has not only transformed their companies but has also contributed significantly to the US economy.

Furthermore, foreign nationals often bring specialised skills and knowledge that complement the domestic workforce. Indian professionals, especially in sectors like technology, healthcare, and finance, fill critical skills gaps and help maintain the US’ competitive edge in global markets.

Taxing remittances — after already taxing incomes — runs counter to this beneficial model and may force foreign nationals to seek friendlier environments in countries like Canada, the UK, and Germany, where immigration and tax policies are more welcoming.

India has the right to reciprocity

If such a tax is imposed, India may have to consider countermeasures under the principle of reciprocity — a common practice in international relations. President Trump himself has invoked this principle while imposing reciprocal duties on imports, bypassing long-standing World Trade Organization (WTO) agreements. India could adopt a similar approach.

While the number of US citizens working in India is relatively small compared to Indians working in the US, the principle could be applied to other financial flows. For example, India could choose to tax outward remittances by US companies. These companies often repatriate large sums to the US in the form of royalties, licence fees, or payments for technical services. Imposing stricter taxes on these payments could also address the methods these companies often use to avoid taxes.

The Indian government could also consider taxing foreign institutional investors (FIIs). Many US-based FIIs invest in Indian stock markets. While they contribute to market liquidity, their speculative activities often lead to significant volatility. India could levy a small tax on their repatriated profits — effectively a version of the Tobin tax, named after economist James Tobin. Tobin had proposed a tax on currency conversion to discourage short-term capital outflow. A Tobin-like tax would serve two purposes: raising revenue and discouraging speculative dollar outflows. A small transaction tax could be imposed each time rupees are converted into dollars for remittance to the US.

We can conclude that the proposed US tax on outward remittances is not only unfair but also potentially harmful to America’s own interests. It penalises hardworking immigrants who are already contributing far more to the US economy. Such a move could alienate the most productive segment of the workforce and trigger retaliatory actions from affected countries like India.

Instead of targeting remittances, the US should focus on creating a fair and competitive environment that continues to attract global talent. The economic benefits from skilled immigration, innovation, and entrepreneurship far outweigh the marginal revenue collected from a remittance tax.

In a globalised world, cooperation and mutual respect yield better results than protectionism and fiscal overreach. President Trump’s administration should reconsider this proposal, given its long-term implications beyond the immediate benefits.

Ashwani Mahajan is a professor at PGDAV College, University of Delhi. He tweets @ashwani_mahajan. Views are personal.

(Edited by Prashant)