After staying shut for several months, PayPal has decided to follow RBI guidelines for online payment services while Plimus has discontinued the direct purchase option for India-based vendors
Moneylife Digital Team
Several online payment gateways like PayPal and Plimus, which have facilitated the sale of goods and services by Indian exporters, are choosing to shut their services rather than follow the guidelines by the Reserve Bank of India (RBI). However, this may have left several small services providers like software programmers in lurch, as they are unable to receive any payment for their work or services rendered to overseas customers. In addition, they might have to opt in for costlier options to receive payments from abroad.
The central bank has said in an email to Moneylife, "While Plimus has not given any specific reasons for removing the direct purchase option for purchases from India-based vendors, it is presumed that this is a direct consequence of the card companies imposing restrictions on foreign payment gateway service providers acquiring payment transactions for Indian merchants through foreign acquiring banks, in compliance with the laws of the country as well as their operating guidelines."
"These service providers acquired and settled all card transactions in foreign currency (irrespective of whether the card is issued in India or abroad). Further, the guidelines issued by the Reserve Bank of India on 16 November 2010 on the processing and settlement of export-related receipts facilitated by online payment gateways may also have resulted in many of such services being stopped," the RBI stated.
PayPal, which facilitated sale of goods and services by Indian exporters, also conducted money transfer business without any specific authorisation from the RBI. According to the Payment and Settlement Systems Act, 2007, money transfer is defined as a payment system and therefore requires the permission of the central bank. "This was brought to the notice of PayPal and they were advised to stop their money transfer business. Further, so far they have not applied to RBI for authorisation to do this business," the central bank said in the email.
Although PayPal provided money transfer service to and from India, neither the company nor its account holders paid any tax on the transactions. According to comments posted on techcrunch.com in February last year, many Indian account holders ask the payee to make the payment as a 'gift', rather than payment for services, to avoid PayPal fees. One such comment said: "A lot of business must be transacted in India via PayPal-business done with personal transactions. So a money-hungry Indian government is aggravated at some perceived revenue loss (taxes, customs, etc) and (has) put pressure on PayPal to stop the payments either directly or indirectly." (Read: PayPal services to and from India to remain suspended for months )
In January this year, PayPal's spokesperson Dickson Seow, wrote in a blog that beginning 1 March 2011, any balance in and all future payments into the PayPal account of an Indian may not be used to buy goods or services and must be transferred to a bank account in India within seven days. He regretted the inconvenience caused specially to global users, starting 1 March 2011, in their purchases from and payments to Indian merchants valued at over $500 per transaction. "For purchases or payments above this transaction value, you will have to use an alternative payment method," Mr Seow wrote.
The service models of some online payment gateway service providers (OPGSPs) have facilitated not only conclusion of cross-border export transactions from India, but also permitted exporters to retain the export proceeds abroad without repatriation, resulting in violation of provisions of the Foreign Exchange Management Act (FEMA), 1999. For transactions routed through online payment service providers, export proceeds are required to be repatriated within seven days of the receipt of confirmation from the importer. This condition is not applicable for export transactions under FEMA, where the proceeds need to be repatriated immediately once realised. In addition, there were concerns about these service providers holding export proceeds till repatriation. In view of the need to protect exporters and ensure that they do not unwittingly violate the provisions of FEMA, the RBI has restricted the transaction value of exports to $500 and mandated that the proceeds should be placed in a Nostro account of an Indian bank by the service providers.
A Nostro account is that account with a bank in a foreign country, usually in the currency of that country. Banks usually prefer to keep a Nostro account so that they do not have to make a currency conversion (which brings with it a foreign exchange risk) should an account holder make a deposit or a withdrawal in the foreign currency.
The RBI has also asked online payment service providers to open liaison offices in India, with the central bank's approval, within three months from the issue of the guidelines. (The guidelines were issued in November, so the deadline for opening liaison offices has passed.)
Some of the service providers may have found adherence to the RBI guidelines tough and costly and so they have decided to shut services for Indians. With fewer firms remaining in the fray, the user may now have to pay more for services.
(Read more: The payment processing industry-I, ;
The payment processing industry-II, The payment processing industry-III, )