Letter of Undertaking (LUT) and its benefits under GST

Introduction

Under GST, Export of goods or services is considered as zero rated supply which means no GST will be levied on any kind of goods or services. Now the question arises if there is no output tax liability for exporter then how the exporter will adjust his input i.e. unutilized balance of IGST. To deal with such situation government has given two options to exporters for claiming a refund for zero-rated supply.

Option 1 (with payment of IGST)

In this option exporter has to pay IGST on export of goods or services by utilizing remaining balance of ITC and if ITC is not sufficient to pay IGST then additional cash is required to pay. However later on exporter will get refund of both the amounts i.e. ITC utilized and additional cash paid with the help of important documents like shipping bill.

Option 2 (without payment of IGST) 

In this option there is no need to pay IGST on export of goods or services but only on one condition if he furnishes Letter of undertaking (LUT) on GST portal and later on exporter will get refund of ITC unutilized i.e. IGST.

Though there are two options for claiming refund i.e. with payment of IGST and without Payment of IGST however it is mostly seen that exporters go for Letter of Undertaking (LUT) because it provides many benefits which will be discussed further in this article.

Letter of Undertaking (LUT)

A letter of undertaking is a document that allows taxpayer to export goods or services without the payment of GST i.e. IGST at the time of export and also it is kind of written promise to the government that the exporter will abide by all the GST regulation and fulfill their tax liability. To be eligible export under LUT, an exporter mush have a valid importer-exporter code (IEC) and clean track of GST compliance.

Benefits of letter of undertaking (LUT)

• Tax free export- Since after furnishing Letter of undertaking (LUT) on GST portal there is no need to pay IGST in case of export of goods or services therefore we can say it leads to Tax free export.
• Cash flow Advantage- Since Taxpayer is not required to pay IGST therefore exporters can avoid blocking their fund in GST payment which help in better cash flow management.
• Simple and online process- Furnishing Letter of undertaking (LUT) is a quick and easy procedure therefore it saves our time and effort both. It makes the complex procedure of import- export easier and simpler for the businesses that are engaged in it.
• Competitive advantage in International market- With the help of Letter of undertaking (LUT) an Indian exporter  get an competitive  edge in International market. By availing zero-rated tax benefits, businesses can offer their products or services at more competitive prices as compared to global market. This advantage can attract international buyers towards Indian zero rated goods or services and exporter will always have competitive advantage over the international market.
• Valid for Entire Financial Year- Once letter of undertaking (LUT) is filed then it is valid for entire financial year there is no need to file LUT for each transaction.

Due date for filing LUT

LUT application is required to be completed before 31st March of starting of the financial year or before supply for Exports and SEZ for example for FY 2024-25 need to file before 31st March, 2024.

Conclusion

Exports that are zero rated can be done with or without payment of GST. A letter of undertaking (LUT) is an important document that allow exporter to export goods or services without payment of GST. Mostly person go for letter of undertaking because it includes many benefits like tax free export, simple procedure and many others that we discussed above. However if exporter fails to file LUT then exporter has make payment of IGST and also it will lead difficulty in claiming refund. Therefore exporter must ensure that letter of undertaking (LUT) must be filed on or before time.