Is Paypal’s suspension of Indian accounts a sign of things to come?

A few days ago, the online payment service Paypal — which is owned by eBay and, by one report, was the driving force behind the auction giant’s Q4 2009 growth — suspended its service in India. It wasn’t a complete freeze. Deposits to Indian banks were still accepted, but no personal activity is currently allowed for Indian account holders.

Paypal says the suspension will remain in effect. According to the company’s official blog, the issue is whether or not the incoming funds constitute remittances. That is, transfers of money coming from Indian citizens living abroad. Presumably, there are tax concerns.

The government’s intervention is bad news not just for Indians who prefer Paypal’s relatively small fees — as compared to, say, Western Union or a direct bank transfer. For many users around the world, Paypal has operated under the radar, largely away from the tax man’s prying eyes. Personally, I use Paypal for the occasional auction, both as buyer (used video games) and seller (those same used video games, a week later). But I also get paid via Paypal from certain freelance clients, including True/Slant. My Paypal usage is typical of the casual user. I’ll claim whatever income appears on a 1099, but I don’t expect the IRS to care about my proceeds from that copy of Left 4 Dead 2.

That’s these days. Several years ago, I earned a lot of money via Paypal. In Bangkok, a savvy friend showed me the ropes of selling counterfeit goods on eBay. We specialized in fake Diesel jeans because Diesel had the best reputation for the least intervention. (Other popular labels, such as 7 For All Mankind, were known for their aggressive anti-counterfeiting operations.) It was a simple and very profitable operation: Buy the best fake Diesel jeans we could find for about $10, eBay them for $75 to $100, ship them from Thailand via insured mail for $15 per pair. After fees, we earned at least $40. That’s a lot of money when you’re sharing a $5-per-night hotel room and eating $1 meals. If a buyer complained about the quality or country of origin, we issued a partial or complete refund — whatever it took to prevent negative feedback.

I made thousands of dollars doing this. Once, I stuffed 30 pairs of fake Diesels in a rucksack and flew to New York City to visit my then-girlfriend (now my wife). The entire trip, including roundtrip airfare and nice dinners, was funded by those jeans.

It’s not like eBay and Paypal were unaware of our activities. It wasn’t unusual for our accounts to be suspended for selling suspected counterfeit merchandise. The giveaway wasn’t the products themselves. Our IP addresses were flagged — and Thailand was on the watch list. Naturally, we learned how to use proxy servers to cover our tracks. If I were still in the business, I’d be watching the India/Paypal controversy very closely. It suggests that Paypal is edging even closer to compliance with local law.

You needn’t be a peddler of fake designer jeans to not want your government knowing your business. Particularly in a place like India, where so-called “black money” drives commerce. In 2006, Asian Times reported that this untaxed money accounts for a $50 billion “parallel economy” that includes everything from mundane household shopping to salaries to major real estate deals. The Indian government has long been concerned with “capital flight”; one former Union Minister has said the national debt could be wiped out if black money were recovered from hidden Swiss bank accounts.

There’s no official breakout of Paypal’s India transactions, but AP reports that the entirety of Asia accounts for less than 7% of Paypal’s total $60 billion business. That pales in comparison to the Rs. 100 lakh crore said to be stashed in Switzerland. (That’s about $2.15 trillion.) But regulation and recovery has to begin somewhere. Is this the first front?

via India PayPal mess will take months to fix • The Register.

via Update on PayPal situation in India.