The proposed 3.5 per cent US tax on outbound remittances by non-citizens, encapsulated within “The One Big Beautiful Bill,” transcends a mere domestic fiscal adjustment; it represents a significant geoeconomic shockwave poised to destabilize the financial lifelines of multiple South Asian nations. 

While India faces the largest absolute impact, the tax’s implications for Pakistan, Bangladesh, and Sri Lanka are disproportionately severe, threatening to exacerbate existing economic fragilities and potentially trigger social and political unrest across the region.

India: The Billion-Dollar Blow and Macroeconomic Headwinds

As the global leader in remittance receipts ($120 billion in FY 23-24), India’s exposure is paramount. With approximately 28 per cent ($32 billion) originating from the US, the 3.5 per cent levy translates to an estimated $1.12 billion annual direct cost to the Indian diaspora. Ajay Srivastava of GTRI unequivocally states this policy “will hit Indian households and the Rupee.”

The primary macroeconomic fallout for India is a potential $12-18 billion annual shortfall in remittances, stemming from an estimated 10-15 per cent reduction in flows. This reduction in USD supply will inevitably exert depreciation pressure on the Indian Rupee, potentially weakening it by ₹1-1.5 per US dollar. 

The RBI will face increased intervention frequency to stabilize the currency, straining foreign exchange reserves. Beyond the macro, millions of Indian households, particularly in remittance-dependent states like Kerala, Uttar Pradesh, and Bihar, rely on these funds for essential expenses, making them highly vulnerable to reduced consumption and dampened GDP growth.

Pakistan: Precarious Economy Under Renewed Pressure

Pakistan, with $29.9 billion in FY24 remittances (10.7 per cent from the US), is another critical recipient. The 3.5 per cent tax could directly reduce US remittances by $112 million annually, with a potential 10-15 per cent overall drop (a staggering $3–4.5 billion) if remitters shift to informal channels. Given Pakistan’s already strained economy, characterized by 12 per cent inflation and critically low foreign reserves ($9 billion), a decline in remittances, which constitute 8 per cent of its GDP, could significantly widen the current account deficit and further pressure the Pakistani Rupee (PKR 278/USD). 

Mohammad Abdur Razzaque of RAPID warns, “For Pakistan, the tax could push small remitters to illegal channels, undermining formal banking flows and reserves,” while Arfan Ali of Bank Asia emphasizes, “Pakistan’s fragile economy cannot afford another hit to remittances, especially from the U.S., a stable source.” The social impact on low-income households in Punjab and Khyber Pakhtunkhwa could be severe, exacerbating poverty.

Bangladesh: Compounding Crisis and Political Volatility

Bangladesh, receiving $24 billion in remittances in 2024 (with the US as a top source at $2–3 billion), faces a direct hit of $70–105 million annually from the 3.5 per cent tax. Razzaque estimates a potential 10 per cent overall drop, equating to a $2.4 billion shortfall. Amidst significant political instability under an interim government, with 9.94 per cent inflation and modest GDP growth, reduced remittances would further deplete foreign reserves ($20 billion in April 2025) and weaken the Taka (BDT 120/USD). 

Toufic Ahmad Choudhury of the Bangladesh Institute of Bank Management stresses, “The U.S. is a critical remittance source. A tax will hit Bangladesh’s banking sector and economic stability,” while K.P. Fabian, a former diplomat, warns that the confluence of political turmoil and remittance losses could “deepen Bangladesh’s economic crisis, affecting regional stability.”

Sri Lanka: Threat to Fragile Post-Crisis Recovery

Still grappling with the aftermath of its 2022 economic crisis, Sri Lanka’s $5.4 billion in 2024 remittances (11 per cent from the US) are vital for its fragile recovery. A 3.5 per cent tax could cut US remittances by $21 million annually, with a potential 10 per cent overall drop ($540 million), further straining its limited foreign reserves ($5 billion in 2025). 

Mohammad Jalal Uddin Sikder of North South University highlights that the tax “reflects a global trend of taxing migrant remittances, hitting small economies like Sri Lanka hardest, where every dollar counts.” The loss of these crucial inflows could slow consumption and impede GDP growth, jeopardizing IMF-backed debt repayment programs.

Regional and Geopolitical Repercussions:

Collectively, South Asia received approximately $190 billion in remittances in 2024, with the US contributing an estimated $28–30 billion. A 3.5 per cent tax could reduce regional inflows by $1–1.5 billion, with India facing the largest absolute loss, while Bangladesh and Sri Lanka experience disproportionate impacts relative to their GDPs.

A pervasive consequence across the region will be a surge in informal remittance channels (hundi/hawala). This shift, as warned by analysts across all nations, will severely reduce financial transparency, complicate central bank monetary policies, and heighten the risk of financial crime.

Beyond the immediate economic consequences, this US policy signals a fundamental shift in the global approach to capital mobility. By impeding these crucial financial flows, the US risks undermining a vital channel for development financing, reducing household income in poorer nations, and exacerbating economic instability in regions already struggling with inequality. The perception of “double taxation” among lawful immigrants, coupled with the tax’s discriminatory nature (exempting US citizens), further strains international relationships. 

The outcome of the Senate vote will not merely reshape financial flows; it has the potential to redefine the very fabric of South Asian economic stability and its integration into the global financial system.

Disclaimer: The opinions and views expressed in this article/column are those of the author(s) and do not necessarily reflect the views or positions of South Asian Herald.

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