One Big Beautiful Bill Act

The newly introduced 1% tax on outbound remittances under the One Big Beautiful Bill Act (OBBBA) by the United States has raised concerns about its potential impact on global remittance flows, particularly for countries like India, which are major recipients of remittances

Key Features of the US Remittance Tax:

1. Tax Introduction:
   • A 1% tax on certain outbound remittances from the United States will come into effect starting January 1, 2026. Initially, there was a proposal for a 5% tax, but it was revised to 1% after bipartisan discussions.
2. Scope of the Tax:
   • The tax applies to physical transfer methods, including cash, money orders, and cashier's checks. This means that bank account transfers or digital payments made via debit/credit cards are exempt.
   • Small transactions under $15 will not be taxed.
   • US citizens sending remittances are not subject to the tax.

Exemptions and Mitigation:

• Bank Transfers and Digital Methods Exempted: This is the key point that will alleviate the tax’s impact for most remitters who use digital or formal channels for sending money. India, as the largest recipient of remittances globally, relies heavily on such channels, especially for Indian-origin expatriates using bank transfers or digital payment methods.
• Small Transactions Exempt: The tax does not apply to smaller remittance amounts under $15, which is significant for lower-income families who may rely on frequent but smaller remittance transfers.

Impact on India’s Remittance Economy:

India is the largest recipient of remittances globally, and a major portion of these come from the United States.

1. Potential Loss in Remittance Inflows:
   • According to the Centre for Global Development, India may lose just under $500 million in formal remittance inflows due to the tax.
   • While this may seem like a minor sum relative to India’s overall remittance receipts of $124.31 billion in FY2024-25, the tax could still influence the transaction costs for many families, especially in rural regions reliant on cash-based transfers.
2. Proportion of US Remittances:
   • Remittances from the US accounted for 27.7% of India’s total remittance inflows, amounting to around $32 billion in 2023-24.
   • Even though the proportion of cash-based transfers is low, the tax may marginally increase transaction costs for these transfers, which could impact poorer households.
3. Macroeconomic Importance of Remittances:
   • Remittances play a crucial role in India’s economy. Not only do they cover the entire trade deficit of $98.39 billion, but they also result in a $26 billion surplus.
   • The growth in remittances (up 16% year-on-year) reflects their increasing importance in financing India’s current account balance and ensuring financial stability.

Distributional and Timing Effects:

• Frontloaded Impact: Economists predict that the impact of the tax will be frontloaded into the first three quarters of FY2025-26, as senders might try to advance their transfers to avoid the tax. This could lead to an increased flow of remittances in 2025 before the tax takes effect.
• However, since the tax is relatively low (1%), the long-term impact will likely remain limited and primarily manifest in higher transaction costs rather than significant reductions in remittance volumes.

Broader Trends in Remittance Flows:

• India’s Remittance Growth:
  • India’s gross remittances have been steadily increasing, with $132.07 billion received in FY2024-25, reflecting a 14% growth over the previous year.
  • US share of remittances has grown from 22.9% in 2016-17 to 27.7% in 2023-24, further underscoring the importance of US-based remittances in supporting India’s economy.
• Cost of Sending Money:
  • Even before the new tax, sending money to India was already expensive. The average cost of sending $200 to India in Q4 2024 was 5.3%, compared to the global average of 6.6%. This indicates that transaction costs for remitters from the US were relatively lower compared to other corridors, though still significant.
  • The 1% tax could further increase these costs, especially in channels involving intermediaries or non-bank methods, which are often more expensive.

India’s Response: Mitigating the Impact

1. Payment Infrastructure:
   India has already made significant strides in improving its cross-border payment infrastructure. For example:
   • UPI-PayNow Link: India has partnered with Singapore for seamless cross-border payments, reducing remittance costs.
   • Project Nexus (RBI and BIS): This initiative aims to enable cheaper, faster, and more transparent global transfers, which will help mitigate the impact of new tax measures and facilitate better cross-border remittance flows.
2. Encouraging Digital Transfers:
   India’s efforts to encourage digital remittance channels, which are exempt from the tax, will be crucial. Digital payment platforms, such as UPI, IMPS, and RTGS, can play a significant role in circumventing the tax and ensuring cost-efficient and timely transfers.
3. Policy Response and Diplomacy:
   India may also engage in diplomatic efforts with the United States to either:
   • Reduce the scope of the tax on remittances,
   • Or explore mutual agreements to minimize transaction costs through better infrastructure and regulatory alignment.

Conclusion:

While the 1% tax on outbound remittances from the US under the One Big Beautiful Bill Act may slightly increase costs for Indian remitters, the overall long-term impact on India’s remittance inflows is expected to be marginal. The exemption for digital channels and smaller transactions will protect most remitters from this tax. Moreover, India's ongoing efforts to enhance payment infrastructure and encourage digital remittance methods will help offset the negative effects of this tax