I have recounted some problems Indian PayPal users had to face in 2010 in my post ‘Hard time ahead for Indian PayPal users’.

Now read in a nutshell how the new PayPal regulations can affect Indian PayPal users.

First of all, despite some problems Indian users had to go through earlier, there is no denying that PayPal was a monetary transaction tool for the small guy on the worldwide web to do some business and earn a few dollars.

In fact you need to be armed with several payment options to buy or sell anything on the internet, if you need to do business online successfully. These are the options to receive as well as pay using credit cards, debit cards, billing and payment collecting agencies/ sites, PayPal, etc.

Earlier, anyone with an email ID could open a PayPal account and receive as well as pay money from any country to any other country in the world. As far as I know, it was the most widely used service by small businesses including home based businesses, small merchandising sites and bloggers.

Things started becoming a little gloomy for Indian users of PayPal in the first months of 2010, as I explained in my previous article. Now it gets tougher. In fact it has become very difficult to use PayPal for Indians, no matter rich or poor.

The changes in PayPal user-agreement are operative with effect from 1 March 2011, pursuant to the requirements set out in the notification of the Reserve Bank of India (RBI Guidelines).

The changes, briefly, are as follows:

1. The balance in your PayPal account and all moneys received must be transferred to your bank account in India within 7 days.
2. You cannot use the money in your PayPal account to pay for purchasing anything, or even to make a donation, or to help a needy relative or friend.
3. The guidelines say that you cannot receive “export-related payments for goods and services” into your account if it “exceeds US$500 per transaction”. Don’t be confused by the term “export-related”, as you understand “exports”. Whatever you do for earning anything from outside India, including selling ads, writing reviews, providing consultancy, etc. may be counted as export of services, because the definition of exports of services is very narrow and can be interpreted as per the requirements of the person who implements the law.
4. A natural corollary of the stipulation that Indians cannot pay anyone from their PayPal account (including to other Indians) is that you can only receive money from persons outside India, and cannot even make a refund to them through PayPal. If you are to make a refund, you have to depend on others like your bank, or use your credit card. (Now the question is, if that is the case, why should anyone use PayPal at all, which is even otherwise very costly, as I will explain later).
5. PayPal is discontinuing the Mass Payment feature for Indians because the payment is made from PayPal account balance, and not from your credit card, even if your PayPal account is credit card verified.

Now here are a few more points:

The most disturbing feature in the new PayPal/ RBI guidelines are (a) the 7-day limit, (b) you cannot accumulate your balance, and (c) you can receive from non-Indian PayPal users but you cannot pay them or make a refund.

Above all, the use of PayPal is going to be a very costly affair for Indian users, especially for those who earn small amounts of money. Such Indian users of PayPal will have to bear losses as follows:

PayPal charges a processing cost/ fee at the rate of (INR) Indian Rs. 50 for every withdrawal to your bank, if the amount is Rs.6,999.99 or less. That means, even if you earn $10, you lose more than $1 every time you transfer money to your bank. If you do not transfer, you will lose your money because of the 7-day limit, and you cannot keep it in your PayPal account.

And, as it happens sometimes, if the amount is be returned to your PayPal account (“deducting any bank charges”), even if the mistake is not yours, PayPal will charge from you a return fee of Rs.250.00 (that is more than $5).

And here is the loss on account of the exchange rate used by PayPal (I transferred some money today from PayPal). The exchange rate applied by PayPal is: 1 US Dollar = 43.4947 Indian Rupees. The actual foreign exchange rate for the day is: 1 US Dollar = 44.9875. That is a loss of Rupees 1.4928 (rounded off to Rs 1.50) per dollar. This is the rate PayPal Pays you even if you transfer Rs. 7000 or more, when they say it is free of charges. How much money does it work out? Is it really free?

These are some of the issues PayPal has to address, and it does not involve any RBI guidelines.