PayPal Inc. last week released a new set of changes in its user agreement for Indian customers in a move one observer says helps the company avoid Reserve Bank of India scrutiny.
In a Jan. 29 e-mail sent to its users in India and in a notification posted on its website a day earlier, the EBay Inc. unit described new limits on how much India’s consumers may hold in their PayPal accounts.
Payments into Indian citizens’ PayPal accounts for exported goods and services cannot exceed US$500 per transaction beginning March 1. This not only would mean that Indian businesses would not be able to receive payments in excess of US$500, but consumers from other countries would not be able to shop with an Indian merchant using PayPal when sales exceed US$500.
Also beginning March 1, PayPal’s users in India no longer may use the balance in their PayPal account to buy goods or services. Instead, they will have to transfer their PayPal balance into in their bank account in India within seven days of receiving payment from buyers.
An official from the National Association of Software and Services Companies, the umbrella organization of India’s information-technology businesses, tells PaymentsSource that the new rules would severely impact the many software and outsourcing businesses that have overseas clients and use PayPal to receive payments for their services.
“However, what compelled the central bank to issue such guidelines remains to be seen, and only then can we take an official stand on this,” says the executive, who requested anonymity.
A former central bank official who previously worked in the regulator’s strategy department tells PaymentsSource that the central bank may have been forced to take the action against PayPal because many individuals and businesses were not declaring the income coming to their PayPal accounts.
Funds coming to India via PayPal are taxable, but authorities cannot track the payments unless the individual declares them. Because PayPal is not a bank, the central bank cannot verify when PayPal funds are received.
“PayPal’s move is a reflex action,” says the official, who now works for a private-sector bank. “The seven-day limit is interesting because central bank rules state that if funds are kept by an institution for more than that period, they must generate interest, and then that institution is to be treated as a bank.”
By establishing the seven-day limit, PayPal evades being treated like a bank and does not come under the central bank’s regulatory reach, he adds. “I suspect the same reason is behind the US$500 limit,” he says.
This is not the first time PayPal has had issues in India. In February last year, PayPal stopped processing personal online payments in that country (
PayPal did not respond to requests for comments by deadline.
