RBI throttles Paypal - One step forward and two step backward


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.

Do banks provide credit cards only to salaried folks?

If you provide proof of the income that you get from your business, isn't that sufficient for a bank to accept an application for a credit card?

No, it does not look like that is the case.

I enquired about a few different possibilities and got no as an answer for all. I checked this out with SBI and ICICI bank.

a) Credit card for myself now that I am a salaried employee and that the firm is now a private limited company
b) Credit card for the company.

I finally got a credit card of my own by depositing as much money as I needed as credit as an FD. Felt pathetic doing that but I couldn't help it given what RBI has done with this paypal regulation.

I have doing freelance work online for past one year. It has been going well. Also I sell domains and websites. PayPal has been very useful to me. Now this will completely put restrictions on my online transactions. Most frustrating fact is I cannot use this fund to pay for other good and services. I always used to pay my hosting bills and domain renewals using PayPal balance.
Need to find another alternative. I do have a credit card, but making all payments through credit card makes it double work.

It is no good moving to another provider, because RBI guidelines would reach them too. It is only a matter of time.


I also got his email, though I don't use paypal much (I use it as a credit card gateway when only paypal is available as a payment option).

If you are still under the illusion that our government works for the people and want to serve us, then wake up. The sole purpose of those in government is to make as much money as possible and they don't have a problem selling the whole country, be it our rivers, jungles, spectrum or what may. The only question is, are they going to get a share of it. Once you understand this, you would not waste your time appealing to the noble spirits of our government.


@Praveen - I agree with you about the present state of things. However I do not agree that that is how it should remain so. The state of things would retain status quo as long as we, supposedly the empowered citizens of India, remain inert and disinterested in policy making. Ideally our government should work for us and if it does not, it would be the duty of each one of us to ensure that it does. Now this is not simple, straightforward or even practical with a few people trying to do this, but cumulatively, with a little bit of effort from a large set of people I am pretty sure we can change anything.

I was shocked to get that email! I use paypal for many online transactions, and this is a shame! I don't have a credit card either.

I also got the mail. For those who do freelance works over the net, its a major blow. The sad thing is that there aren't much popular alternatives for online fund transfer from abroad.

Well, you can get a credit card now, even if you are not employed, by keeping a FD with the bank. SBI provides it, under the name advantage card and I have one :) They provide around 90% credit limit of the amount in FD.

@Manu - it would be an insult to myself if I have to have an FD in a bank to prove my credit worthiness and own a credit card. :-)

Well, for me, I was badly in need for one. And being a student, I don't have much to prove my credit.

Just let you know that there was an option.

@Manu - thanks for the information. Now I know that there is some scope for entrepreneurs to get a credit card although I am still not going to avail that facility.

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