PayPal Restricts Payments To India, Bars Purchases; Why They’re Right

So I’m going to go against popular sentiment, and stick my neck out and say that the restrictions put by RBI on PayPal, announced yesterday, and in force from March 31st 2011, are right. Here’s what has happened – after almost of a year of to and fro between PayPal and India’s Reserve Bank of India, PayPal announced last night that it is amending its user agreements to bring about two significant changes:

1. Can’t store money in Paypal Account, and can’t buy online. Any balance in and all future payments in an Indian users PayPal account cannot be used to buy goods or services, and needs to be transferred to their bank account within 7 days of receipt. What this means is that Paypal is essentially functioning as a money transfer service, and not an online wallet.

2. Can’t receive payments for goods and services exceeding $500 per transaction.

What this means:

PayPal is no longer an online wallet operating in India: Online wallets, not linked to bank accounts, are not allowed in India, and for years now, PayPal has been operating as an unauthorized wallet. The way it has operated means that for services to be performed in India, money has been stored with PayPal, and used to make payments overseas. Remember that Wallet365, from the Times of India Group* was shut down a few years ago. Our stand has always been that if PayPal is allowed to operate as an online wallet in India, then so must others. The RBI does allow prepaid cards (cash in, but no cash out), but not online wallets (cash in cash out systems).

– For Freelancers: this is not a good development from a developers perspective: many students and employees have been, on the side, moonlighting as developers, and in order to pay for server space or domains, instead of using PayPal, they will have now to remit the entire payment to India, to their bank account, and then use a credit card or net-banking to make payments. This means that now, for the entire income, they will have to at least pay personal income tax, whereas, earlier they didn’t need to. It’s the governments right to collect tax on any such income, which it was earlier being denied by those maintaining money in the online wallet. Now, they can only transfer money.

So don’t blame the RBI (a reader sent us a mail titled “PayPal & RBI Screwing Freelancers again”): if PayPal wants to operate in India, it must abide by the laws of the land. Just because they were operating as a wallet earlier (and making money from it, incidentally), doesn’t mean it was right; there’s always a lag between industry practices and regulation.

My sense is that the limit that the RBI has set, of $500, is notional. It’s possible that after observing payment trends and ensuring that PayPal is conforming to its guidelines, the RBI might increase the amount. After all, it’s income for the country.

PayPal Alternatives, And What You Need To Know About Them

Over at PluggdIn, they’ve published a list of alternatives for PayPal. By the looks of it, some of these are payment gateways, and not really wallets. If they are wallets, then you should know that the same regulation will apply to them. They might get away with it for a while, but it won’t last. The RBI will always have the upper hand in this matter – they can simply tell banks to stop accepting payments from an errant gateway.

The PayPal vs RBI Timeline:

Feb 5th – 14th 2010: PayPal Disallows P2P Payments, Transfers To Local Banks

Feb 27th 2010: PayPal To Resume India Payments By 3rd March; Export Code Needed

Mar 2nd 2010: PayPal Payments In India Will Require ‘Purpose Code’; Still No P2P

Mar 18th 2010: PayPal Needs To Comply With RBI Regulations By April 30th, 2010

Jan 18th 2010: PayPal Restricts Payments To India To $500, Bars Purchases; They’re Right

Email Received From PayPal

Dear Nikhil Pahwa,

As part of our commitment to provide a high level of customer service, we would like to give you a 30-day advance notice on changes to our user agreement for India.

With effect from 1 March 2011, you are required to comply with the requirements set out in the notification of the Reserve Bank of India governing the processing and settlement of export-related receipts facilitated by online payment gateways (“RBI Guidelines”).

In order to comply with the RBI Guidelines, our user agreement in India will be amended for the following services as follows:

  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.

We seek your understanding as we continue to employ our best efforts to comply with the RBI Guidelines in a timely manner.

We regret any inconvenience caused to you and hope the advance notice will enable you to plan your future use of our services accordingly.

If you have any questions, please contact PayPal customer support by logging into your PayPal account and clicking on ‘contact us’ at the bottom of the page. We sincerely thank you for your patience and continued support.


The PayPal Team