Taxing time for migrants: US' remittance tax furthers Trump's agenda

Embedded in the “big, beautiful” tax-and-spend Bill that the United States (US) House of Representatives passed by a razor-thin margin of one vote (215 for, 214 against) is a small, unattractive provision that is likely to hit a range of non-citizens in the US. This is the 3.5 per cent “remittance tax” that is to be imposed on all green card and non-immigrant visa holders in the categories of H1B, L1 (which allow multinationals to temporarily transfer employees from foreign branches to the US) and F1 (students). The tax cannot be offset against other federal or state taxes paid in the US. Though there is general relief that the tax has been reduced from 5 per cent in the original clause, the impost is likely to have unintended negative consequences.

 

The rationale for imposing the tax is ostensibly to protect dollar outflows. The US remains the world’s top remittance sender. In 2023, some $85.7 billion was remitted by migrants living in the US. That accounted for roughly 27 per cent of global remittances. Set against the larger picture, however, the economic rationale appears to be weak. The larger motive appears to advance the Donald Trump administration’s anti-immigrant agenda. These remittances do not have the sort of deleterious impact on either exchange rates or reserves as their inclusion in the Bill suggests. Overall, remittances account for way less than 1 per cent of US gross domestic product. But given the relative strength of the dollar, its impact on families in recipient countries will be significant.  About 5 million Indians hold US visas of some description, with 207,000 holding the H1B visa and 331,000 holding the F1 visa, and they account for a significant proportion of green card holders. At about $32 billion, the US accounts for roughly 27 per cent of India’s inward remittances. At the very least the tax will impact corporate mobility programmes and spending in recipient countries.

Apart from discouraging immigration, it is hard to see what the US gains from this tax. Silicon Valley, with Mr Trump’s new-found cheerleaders, is already beginning to fear an impending talent crunch as a result of the administration’s anti-immigrant agenda. Access to talent is likely to be squeezed further if foreign students, a mainstay of university revenue, look for alternative countries to pursue higher education. As far as India is concerned, the remittance tax is also a reflection of bad faith since New Delhi scrapped the 6 per cent “Google tax” on online advertising from April 1 as a gesture of reciprocity ahead of a trade deal. It may also violate the non-discrimination clause in the Indo-US Double Taxation Avoidance treaty, though there is no legal clarity on this yet. 

Ironically, rather than encouraging migrants to keep their money in the US, the tax is likely to encourage them to seek below-the-line workarounds. One of them could be the resurrection of hawala transactions, which had waned among individual users as exchange controls were liberalised. This would be a wholly undesirable development, weakening mechanisms to track international money flows. Whatever the demerits, the Bill containing this provision is likely to pass the Senate in June, where the Republicans have a more comfortable majority, and is expected to be signed into law by 2026. Indians must brace for impact.