We were first to report the ongoing Paypal issue with Indian customers. Few days ago Paypal updated their customers about the situation informing that Reserve Bank Of India (RBI) has blocked these transactions citing import/export laws, despite being the information being pretty clear about the need of Importer Exporter Code (IEC) needed only if you are an exporter (see quote below) blogs started posting information that Indian users need to apply for IEC code via Ministry of Commerce and Industry to withdraw any money from Paypal in future.

Misinterpreted part of PayPal's information update :

However, if you are an exporter, you will continue to be able to use the PayPal service for payments of goods and services. In fact, with the changes we are making to our system, PayPal is now set to be a more powerful engine for exporters in India. With purpose codes for export transactions and FIRCs (Foreign Inward Remittance Certificates), you should now be able to get the export related benefits you seek.

However, to put an end to all the confusion Paypal has now posted an update on their blog clarifying that users wont need the Importer Exporter Code (IEC) if they do not export goods but will simply require to quote a newly introduced "purpose code" which allows banks to furnish information required by the Reserve Bank of India to identify the nature of the cross border transaction. Withdrawals to Indian bank accounts will resume from 3rd March 2010 and you can find the appropriate "purpose code" in the table at the end of the post.