• How an LUT Can Help You Save on Taxes

    LUT

    A Letter of Undertaking (LUT) is a document that exporters can file to export goods or services without having to pay taxes. Under the new GST regime, all exports are subject to IGST, which can later be reclaimed via a refund against the tax paid.

    Given the difficulties faced by many exporters in processing of tax refunds, alternative options can seem very attractive. An LUT spares exporters the effort of pursuing a refund and eliminates the blocking of funds by way of tax payments. Its filing can be done online, making it super-easy and quick.

    Eligibility and other criteria

    Under CGST Rules, 2017, any registered person can furnish a bond or LUT in form GST RFD-11 and export goods without the payment of integrated tax. They can apply for LUT if they:

    • Intend to supply goods or services to India or overseas or to SEZs
    • Are registered under GST
    • Wish to supply goods without the payment of an integrated tax

    An LUT can be submitted by anyone registered under GST, provided they have not been prosecuted for tax evasion exceeding Rs. 250 lakh, or for any other offence under the CGST Act, the IGST Act 2017, or any other prevailing statute.

    Key things to remember

    Let’s now look at some important information related to LUTs:

    • An LUT remains valid for 12 months from the date of its submission.
    • The LUT is accepted subject to certain conditions. Failing to comply with these can lead to the revocation of privileges associated with the document. In such cases, the exporter would be required to furnish a bond.
    • A bond can also be furnished by entities that are not eligible to submit an LUT. It must be on non-judicial stamp paper and accompanied by a bank guarantee. The bond must cover the estimated tax liability based on the assessment of the exporter.
    • An LUT is required to be filed on the letterhead of the registered person who intends to supply goods/services without the payment of integrated tax.
    • The LUT must be duly applied for in the prescribed GST RFD-11 form. It can be filed by the MD, company secretary, or other authorized people. In the case of a company, the form can be filed by the partner of a partnership firm, or by the proprietor.

    The bank guarantee accompanying the bond should not exceed 15% of the bond amount, and it may be waived by the jurisdictional GST Commissioner.

    Process and documentation

    The first step in furnishing a LUT is to log into your profile on the GST portal.

    1. Under the ‘Services’ tab, the ‘User Services’ drop-down has the option of ‘Furnish Letter of Undertaking (LUT)’.
    2. Once this is selected, the first thing to do is to select the financial year. This is where a manually furnished LUT can also be uploaded in PDF or JPEG format.
    3. Next, a self-declaration must be filed, in which one undertakes to:
      • Complete the export of goods/services within three months of the date of issue of export invoice, or such further period as allowed by the Commissioner
      • Adhere to the GST laws with respect to exports
      • In case of failure to export, pay the IGST along with interest at the rate of 18% from the invoice date to the date of payment of IGST
    4. You are required to fill in the names of two independent witnesses, along with their occupations and addresses.
    5. In the next screen, enter the place of filing. Once this procedure is complete, you may preview the form.
    6. The application can be signed with a registered digital signature certificate or via electronic verification code. Both options appear on the form. Once signed and submitted, the form cannot be edited.

    Why is the LUT significant for exporters?

    By opting for the LUT, an exporter can export goods and services without having to pay taxes. If this option is not opted for, the exporter will have to pay tax on their export and later claim a refund on the zero-rated exports.

    The LUT ensures that exporters don’t have to go to the trouble of claiming a refund or following up with the IT department. Much time can be saved by avoiding the refund route. Till the refund is received, any amount paid as the tax will remain blocked. In the case of regular exports, an amount will remain perpetually blocked in incoming tax refunds. An LUT frees up this working capital, particularly important for SME exporters struggling with financing and working capital issues.

    The LUT is also beneficial for regular exporters. An LUT once filed remains valid for the entire financial year. The process of filing the LUT and its acceptance by the department has been made easy; the entire exercise can be conducted online. The submission of a few supporting documents along with the specified LUT form is sufficient to set the ball rolling, and help exporters save much-needed working capital from getting stuck in tax refunds.

    Spandan Sharma
    Spandan Sharma
    Heading content marketing and corporate communication efforts at Drip Capital.
    5 min read