So much for the storm in the tea cup and the emotional outbursts against the RBI and paypal and all the ravings and rantings of my fellow freelancers who wished to commit a business suicide where freelancing was concerned!

Before talking about the implications of this move and also what Indian freelancers need to look out for in the future, I would like to appreciate the extremely professional and collected manner in which Paypal has handled the crisis. While the Indian business is not very large, Paypal had a commitment to its clients and perhaps all the Asian clients were watching the fall out and outcome of the crisis. Paypal remained tightlipped during the initial phases of the crisis to avoid speculation and panic and calmly set about doing whatever it takes to set the situation right for everyone round. Kudos to Paypal!

Well, the purpose code as Paypal chooses to call it will give a hook for RBI to collect the data and also evaluate the amount of foreign exchange that is being transacted by Indians. It will also help the premier bank frame a policy for how it will handle this type of foreign trade in the future. In a sense this is real good news for the Indian freelancers and could be bad news for those who are making big money in this field and not paying their taxes on Income? There is now a tracking mechanism in place where transactions through paypal are concerned. The good news is that India is getting ready to regularize the largely unorganized sector that operates over the Internet.   Maybe Indians will no longer be vulnerable to the scamsters and sharks that populate the Internet. Maybe cyber laws will offer some newer modes of protection to this largely helpless and vulnerable set of small businesses that are mushrooming in India.

One question that needs to be answered is: What about those thousands of Auction sites like Rentacoder, Elance, guru, getafreelancer etc which also do a kind of payment settlement for Indians? They act as intermediaries between buyers and sellers and collect money from buyers on behalf of sellers and then settle accounts with the latter at the end of every month. Do they also need to get a license from the RBI to operate in the Indian context?  These sites have a tie up with Paypal and payment agencies like Payoneer or they send checks to Indians by snailmail. Will RBI be contacting them next with requests for compliance? The RBI does not seem to have contacted these sites as yet.

Let us wait and watch. Stay tuned in for more from me on this blog!

The Foreign Trade(Development and Regulation) Act 1992 stipulates that every exporter or importer of goods and services must apply for and obtain an Importer-Exporter Number(IEC Number).  The application for obtaining this number needs to be made under section seven of this act to the Director General. Under this act an importer is anyone who brings in goods or services into the country and an exporter is one who sends out goods and services via land, sea or air. However, the term “goods” is not defined in the act itself and the meaning is derived from the dictionary meaning of the word or from the Import-Export regulation act of 1947 which preceded the current act. As per this act “goods” is defined as any “article, animal, substance or property whatsoever”.

There has been a lot of controversy whether sending of digital material over the Internet would qualify as “goods” or “services” and whether the process of transmitting the information over the Internet falls within the ambit of sending out of India goods or services “by land, sea or air”.  Since the issue was unclear, freelancers were not asked to apply and obtain the IEC number under section 7.

However, there was a move to include services into the ambit of the act from time to time. Objections from the Finance Ministry kept the amendment at bay for some time.  The Standing Committee on Commerce made suggestions on Foreign Trade (Development and Regulation) Amendment Bill, 2009 which included a suggestion to bring “Techonology” and “services” including “financial services” under the ambit of the act.  The bill was  submitted on the 25th of November 2009 to effect the following amendments.

2(a) (ii) Supplying Service or Technology from the territory of India to another country; from India to a service consumer in another country; by a service supplier in India through a commercial presence in another country; through a service supplier in India, through Indian naturals in the territory of another country.

Elaborate definitions of service and technology have also been included in the act. You can get more information at http://164.100.47.5/newcommittee/press_release/bill/Committee%20on%20Commerce/Foreign%20Trade%20%28Development%20and%20Regulation%29%20Bill,%2020090001.pdf .  The net result of this amendment would be that all freelancers who supply software or other kinds of services to consumers abroad must apply for and obtain a IEC number.

I am unable to ascertain whether the bill has been passed or is still pending. If it has been passed, freelancers should get ready to apply for the IEC number! Stay tuned in for more information!

Finally, the Paypal spokesman stated in a blog post that

• Paypal had suspended the services to respond to enquiries from Indian regulators, specifically questions on personal payments and whether these payments constitute remittances into India.
• He assured the Indian clients that Paypal is working with the Indian regulators to get the issues resolved quickly and on priority and apologized for the inconvinience being caused.
• However, he could not give a timeline for resolution and said that it could take a few months, since the regulators had let Paypal know about the revised licensing rules only recently.
• Meanwhile Indian clients who had initiated withdrawals would be credited with the amounts withdrawn and any losses that may be incurred due to currency fluctuation and withdrawal charges.
• Negative balances arising from reversal of transactions would be resolved case by case if the client requests for a resolution by clicking the “Resolve Negative Balance” link on the Account Overview Page.
• All instances where business payments were erroneously reversed as personal payments can be resolved by requesting the payer to follow the instructions on the site and to make the payment again.

Why did this happen? What are the revised regulations that have impacted them? New York Times informed the Indian clientele. To quote them:

“Providers of cross-border money transfer service need prior authorization from the Reserve Bank under the Payment and Settlement Systems Act,” a spokeswoman for the Reserve Bank of India, Alpana Killawalla, said in an e-mailed response to questions. “PayPal does not have our authorization.” http://www.nytimes.com/2010/02/11/business/global/11paypal.html

It is seen from the Paypal website that Paypal has license to operate a remittance business in many parts of the world but not in India. They feel that they are not in the remittance business in India because they perform online transactions only. Recipients transfer the money to a bank or withdraw it.

The Indian Payment and Settlement Systems Act, however, demands that anyone desirous of setting up a payment system in India should apply for and obtain a license to operate in India under section 5 of the act.  Under the provisions the Reserve Bank of India will have the right to regulate and supervise payment systems including electronic payment systems. The bank can lay down standards for the setting up of such systems; authorize the set up of the system; determine the criteria for the membership; and oversee the administration and regulation of the guidelines laid down under the act.

Consequently, Paypal has no choice but to decide to apply for an authorization under this act if it wants to continue its operations in India. It is expected that Paypal will be applying for the license immediately and will be allowing its Indian clients to withdraw monies into their Indian bank accounts soon. So those who hold accounts with Paypal hang on! A resolution of the problem seems to be on its way!