Paypal could just send the USD directly to his bank, and the bank would convert the currency before crediting his account, so it is an unnecessary burden and loss of money for him.
And for a very good reason.
Tax evasion is very common in India. In fact the most generally know thing is, if taxes are not deducted at the source of the transaction they won't be paid ever. Big money people are a little different, they are small in number to monitor and their transactions can be traced out easily.
But small to medium scale traders and business hardly pay taxes. Some even pride in doing so. The best case I've seen among these guys is paying some thing like paying 5% of the taxes they are supposed to pay. I've asked a few people why they don't pay, and the answer comes simple. If they pay the right taxes once, given the business growth they have to pay a little more next year. So they use every trick in the book to pay as little or nothing at all.
Now if they are allowed to freely park money in places where it can't be traced easily(like these) they will have a field day.
May be if citizens show a little responsibility and do what they are honestly supposed they will get laws that trust each other. Until then if the government has policies to curb fraud you shouldn't look too surprised. After all, laws are optimized for the common case.
There is a big difference between minimizing your tax burden and pretending you dont have assets/revenue so you straight up dont have to pay taxes on them.
http://i.imgur.com/GIaP5O2.png
THIS is entirely PayPal's fault. They can avoid it easily if they want to but NO. They have an opportunity to fleece some extra $$ from a merchant so they do.