I got this mail from paypal today that said that they are adding new restrictions to their offerings to Indian users of paypal because of RBI regulations. The changes have a pre-1990 feel to it. It looks like somebody somewhere thought that a vibrant and growing SME sector is bad for the Indian economy. Just when you started thinking that India is changing and becoming a good place to start your startup.
The following are the two main changes brought about by this RBI regulation
1. Any balance in and all future payments into your PayPal account may not be used to buy goods or services and must be transferred to your bank account in India within 7 days from the receipt of confirmation from the buyer in respect of the goods or services; and
2. Export-related payments for goods and services into your PayPal account may not exceed US$500 per transaction.
It looks like RBI is trying to achieve two things here
a) Ensure payment of taxes on income and not allowing the income to be used for expenses before taxation and underreporting income.
b) Bring the regulatory eye of the banking system on all high value transactions to prevent tax fraud and funding of illegal activities.
The objectives look very good indeed. However the implementation seems to be highly ill thought out.
Let us take a few possible scenarios.
* If I am big company planning to evade taxes I would definitely not be working over a paypal account. I would have my own bank account and a holding company in some tax haven. I would also save on the paypal transaction charges that way.
* If I am a smuggler trying to bring in goods illegally into the market I wouldn't be interested in paying the 3.4% transaction charge and the 2.5% dollar conversion charge to handle the funds.
* If I am a terrorist trying to fund a terrorist organization I would be bringing in either real dollars and converting it in the black market or I would bring in counterfeit money.
* Now if I am a new startup trying to make it on the web and competing with my peers in the silicon valley I would be using Paypal to reach out to an international audience
* If I am a freelancer trying to offer my services over the web I would be taking payments via paypal as most of my clients would be able to pay me via Paypal.
* If I am a small business trying to reach out to the global market I would be taking payments via paypal because it would be convenient for all my clients and because the payments are normally not too big to warrant alternate payment options.
* If I am an entrepreneur trying to pay for online services I would be using paypal because I wouldn't have a Credit Card. None of the Indian Credit card companies would be giving me a credit because I do not have a job. Coming to think of it, I still don't have an Indian credit card because I am jobless by the definition of Indian credit card providers.
If India has to grow and compete with the rest of the world it has to make life easier for the small and medium enterprises. By shackling this sector and impeding its growth our bureaucracy is not only denying opportunities for them but also committing a crime against our future generations. We must understand that the economy is not driven by Tata's or Reliance's or Infosys's or Wipro's but by the hundreds of thousands of small and medium enterprises.
Regulations are not going to prevent people from evading taxes or committing crimes. People intent on committing these acts would get around regulations anyway as regulations only apply to law abiding citizens after all. So Government of India please wake up and repeal this draconian regulation. There must be other ways of achieving the objectives of the regulation without hurting the operations of tens of thousands of SMEs.