technoholik

The PayPal blog has just posted details of the new procedure for Indian users to withdraw funds into Indian bank accounts linked to their PayPal accounts from tomorrow onwards. Withdrawals to bank accounts have been suspended for users of the service in India, for nearly a month now, on the behest of the Reserve Bank of India (RBI). There seems to have been yet another change of policy over the weekend, with users now just expected to enter something called a “Purpose Code” rather than an official IEC (Importer Exporter Code) as had been suggested on Friday. [Update: The original PayPal post in fact refers generically to 'an Export Code' and not specifically to the IEC, which just seems to be an assumption that was fuelled by TechCrunch among others. That has now been clarified to mean 'purpose codes' as mandated by the RBI to explain the nature of any Forex (foreign exchange) receipt in India. End of Update] Also, the fact that Deutsche Bank gets one code and “All Others” get another, suggests that DB India is PayPal’s local settlement partner?

Dropping the IEC Plan

In our opinion this just brings the entire controversy to a rather farcical end. All PayPal has to do, is add an extra field/drop-down box for this “Purpose Code’ in its invoice forms and it can claim to have kept its end of the bargain!  The original plan of asking for a valid IEC would have required a one-time authentication, to prevent people from entering in fake codes. The problem, we’re guessing, is that the Ministry of Commerce & Industry doesn’t have an online version of its IEC database which can be accessed in real-time. So now with these purpose codes which require no authentication, the onus of verifying whether the services rendered fall into the categories listed, falls back on the bank/government agency that choses to investigate someone whose bank accounts are showing suspicious amounts of foreign money coming in via PayPal.

Effectively, nothing’s changed

But hey! Wasn’t this the case earlier as well? A by-the-book type of person should anyway have been withdrawing funds into a bank account that belonged to a tax-paying entity with a valid IEC, if needed. Those who were trying to use PayPal as a personal remittance service earlier will still take the chance that they won’t be caught by the Income Tax department, as they attempt to receive payments for “Goods or Services”, especially since categories like “Content & Journalism” are so delightfully vague. I could claim that I’m charging my brother (who lives/earns overseas) $1000 for a one-line blog post that I write for him every month!

In our opinion, all that the RBI had to do was to explicitly rule that any money coming into a bank account from a non-accredited payment service would not qualify as tax-free remittance and would have to be declared as income (in foreign currency) for goods and services, with an appropriate IEC or other license(s). If the taxman flags your bank account after seeing a lot of overseas money pour in, you should be ready to show him documentary proof that you declared it and paid taxes or be prepared for a fine! Whether you put in an extra line of text with “purpose” or not is irrelevant if you’re already following the legally ‘correct’ procedure. But then again, our system loves procedure that’s true to letter rather than spirit!

We’ve requested PayPal India for clarifications and should have an update by the end of the day. In the meanwhile, here’s some coverage of the issue from the Indian blogosphere:

Medianama.com: eBay’s PayPal Disallows P2P Payments, Transfers To Local Banks

Watblog.com: Paypal India Block Leaves IT Guys High & Dry – Need For An Indian Paypal?