• PTA
• 18 November, 2024

Understanding LUT (Letter of Undertaking) as per GST Act 

Under the Goods and Services Tax (GST) regime in India, the Letter of Undertaking (LUT) plays a pivotal role for exporters. Filing an LUT allows businesses to export goods or services without paying integrated tax (IGST). This exemption is granted under Section 16 of the IGST Act, which categorizes exports as "zero-rated" supplies. Here’s an in-depth look at LUT under GST, covering everything from eligibility to benefits and filing procedures.

What is an LUT in GST?

An LUT, or Letter of Undertaking, is an application which allows GST-registered businesses to export goods and services without payment of IGST. The exporter commits to the government that they will comply with all GST requirements within a stipulated time frame and allows ease of doing business as this allows company to prevent paying tax upfront and subsequently claiming refunds. Ealier business used to pay taxes and then claiming it as refund was a time consuming and non economical process leading to frustration amongst exporters.

Who Can Apply for an LUT?

As per GST regulations, all GST-registered entities involved in the export of goods or services can apply for an LUT.  Below are the conditions which must be fullfilled before applying LUT:

1. The exporter should not have been prosecuted for any GST offences or tax evasion exceeding ₹250 lakh.

2. An LUT can only be filed for exports that are categoried zero-rated under GST regime.

3. Any taxpayer engaged in exporting goods, services, or both, or supplying to SEZ units without paying IGST.

Why File an LUT?

The LUT process provides several advantages for exporters:

• Cash Flow Efficiency: Avoiding upfront payment of IGST enables businesses to maintain better liquidity.

• No Need for Refund Applications: When exports are conducted without an LUT, exporters need to pay IGST first and apply for a refund later. LUT simplifies this by eliminating the upfront tax requirement.

• Compliance Ease: Filing an LUT is relatively straightforward and quick, especially since it can be done online through the GST portal.

• Streamlined Export Process: LUT expedites the process of making goods and services available for international buyers without tax implications, thereby simplifying exports.

Steps to File an LUT Under GST

Filing an LUT is a streamlined online process, making it convenient for exporters to comply with the requirements. Here is the step-by-step procedure:

1. Login to the GST Portal GST.gov.in.

2. From the main menu, go to the "Services" tab, select "User Services," and click on "Furnishing Letter of Undertaking (LUT)."

3. Fill in details such as financial year, export type, and supporting documents as required.

4. Choose an authorized signatory who will submit the application. This person must have a Digital Signature Certificate (DSC) or e-signature.

5. Once all details are provided, applicant can submit the application. Post submission a unique ARN (Acknowledgement Reference Number) will be generated, indicating successful submission.

6. Once submitted, the GST authorities will verify and approve the LUT application, making the business eligible to export under LUT for that financial year.

Validity of LUT

An LUT filed under GST is valid for one financial year. Exporters needs to file a new LUT at the beginning of each fiscal year to continue availing of the IGST exemption on exports. It’s essential for businesses to stay compliant and file renewals promptly to comply with GST requirements.

Conditions and Compliance for LUT Holders

Upon filing an LUT, exporters commit to several compliance requirements. Key conditions include:

• Adherence to Export Timelines: Goods or services must be exported within three months from the date of the invoice.

• Payment to Government: In case of non-compliance, exporters may be required to pay IGST with interest.

• Annual Renewal: Businesses must renew their LUT annually.

Exporters should also maintain accurate records and ensure that exports are completed within the timeline to avoid potential penalties.

Differences Between LUT and Bond

When exporters cannot fulfill LUT conditions, they must file a bond instead. The major distinctions include:

• Financial Obligation: An LUT requires no monetary security, whereas a bond necessitates a bank guarantee.

• Eligible Entities: LUT is typically preferred for compliant entities, while bonds may be required for those with a history of defaults.

Choosing between an LUT and a bond depends on an exporter’s compliance history and ability to meet GST requirements.

Benefits of Using an LUT for Exporters

The LUT under GST has been a game-changer for Indian exporters, with notable advantages:

• Reduced Cash Outflow: Helps maintain liquidity by eliminating the upfront tax burden.

• Simplicity in Tax Refunds: Direct exports under LUT reduce the need for complex refund processes, saving both time and resources.

• Encouragement for Compliance: As LUT is only available to compliant businesses, it promotes adherence to GST laws.

Common Challenges and Tips for Filing LUT

While filing an LUT is generally straightforward, exporters may encounter some challenges:

• As the filing process is entirely online, portal downtimes or technical glitches can disrupt submissions.

• Incomplete or incorrect information can delay approvals, so ensure accuracy during application.

•  Since LUTs expire annually, it’s important to renew them early to prevent any non-compliance.

Conclusion

Filing an LUT provides convenience from both practical and financial view point to those businesses looking to streamline their export operations under the GST regime by eliminating the need to pay IGST on export. Once LUT is filed with GST department, business need not to pay any taxes on their export sale and therefore beneficial from cash flow perspective. With India’s export market growing, the GST LUT provision is likely to remain crucial for helping businesses expand globally without unnecessary tax complications.