Letter of Undertaking the Exemption from Taxes for the Exporters

The GST law is very beneficial to the exporters of India, and the Letter of Undertaking (LUT) is one of the most significant ones. Filing an LUT enables exporters to make exports of goods or services without paying IGST, which contributes to better financial responsibility, improved working capital, and smoother international transactions. Majorly, LUT is important in the export ecosystem, particularly to MSMEs, manufacturing units, service exporters, and merchant exporters.

This blog explains the meaning of LUT, how it helps exporters remain tax-free, the filing process, eligibility, validity, required documents, advantages, and compliance requirements.

What is a Letter of Undertaking (LUT) under GST?

An exporter can declare and export goods or services without paying IGST in the GST portal by submitting a letter of undertaking, also known as the GST LUT.

Exporters can also use LUT to ship goods without paying the tax and seek a refund later, which would block working capital.

Rule 96A of the CGST Rules governs LUTs, but once approved, they remain valid throughout the financial year.

The importance of LUT to the Exporters

Exporters tend to handle bulk shipments and high-value dealings. The fact that IGST has to be paid on each export invoice and that you have to wait months to get a refund can be financially stressful. LUT solves this problem.

The main reasons why LUT is a necessity:

1. Guarantees exportation without paying IGST.
2. Enhances cash flow and decreases blockage of working capital.
3. Eliminates wait time for processing the refund.
4. Streamlines export and GST.
5. It is required for exporters who do not wish to make monthly tax payments.

LUT is a significant relief for small firms and startups venturing into export markets, providing them with the ease to conduct global trade.

Eligibility to file LUT under GST

The majority of exporters are eligible to submit LUT. The GST law permits the following categories:

1. All exporters of goods.
2. Service exporters.
3. SEZ suppliers.
4. Merchant exporters.

Previously, LUT was restricted to specific groups; however, at present, any registered taxpayer with the desire to export without paying IGST may apply for LUT.

Restricted to only those who have been prosecuted because of tax evasion of Rs.250 lakh and above.

Documents Required for Filing LUT

Exporters usually require:

1. PAN and GST information of the business.
2. Signatory information is authorised.
3. Export invoice files (no need to upload, just to have in the system).
4. Previous LUT (if filed).
5. Digital signature (companies and LLPs).
6. Bank account and IEC (not obligatory but helpful) information.

GST portal does not entail a lot of documentation; the majority of information is auto-filled.

How  LUT offers Tax Exemption to Exporters

LUT assists exporters to receive full exemption from taxes when they transfer goods or services to other nations.

• No IGST on Export Supplies: In the absence of an LUT, exporters will have to pay IGST on their exports or claim a refund later. Exports with an LUT are considered zero-rated supplies, meaning exporters can export goods at zero IGST.
• No Documentation of Burden of Refund: IGST payment together with refund claims needs extra paperwork, shipping bills, bank realisation certificates, and refund claims. LUT eliminates this effort.
• Better Cash Flow Management: Exporters will tend to be on thin margins. The absence of the need to pay IGST in advance serves to keep the liquidity and facilitate business operations.

Step-by-Step Process of Online Filing of LUT

The GST portal has a feasible online procedure.

The step-by-step guide is given below:

Step 1: Authenticate on the GST e-Filing Portal

Open the official GST portal and enter your user name and password.

Step 2: Access Services – User Services – Furnish LUT

There is a section called User Services, where the Furnish Letter of Undertaking (LUT) is located.

Step 3: Select the Financial Year

Select the financial year that you wish to file the LUT.

Step 4: Complete Necessary Disclosure

Most details are auto-filled. Ask about information, read the undertaking clauses, and continue.

Step 5: Submit Supporting Documents (where necessary)

There are past LUTs that are optional, but the businesses may attach them as records.

Step 6: Sign and Submit LUT

• Authenticate using DSC or EVC (OTP on registered mobile/email)
• The LUT is created immediately when it is submitted and can be downloaded at any time.

Validity and Renewal of LUT

• LUT applies to a single financial year (e.g., 2024-25).
• A new LUT has to be presented by exporters annually.
• Otherwise, exporters will not be able to export without paying IGST after the end of the financial year.

The process of renewal is speedy and can be achieved in minutes via the internet.

Penalties if LUT is Not Filed

In the event of exporters not filing an LUT:

• They will be required to pay IGST on export invoices.
• The sole option to claim back IGST is the case of a refund.
• Cash flow is held up as months pass by.
• Another GST compliance cost is added.

This renders LUT filing vital to all exporters.

Advantages of LUT to Exporters

• Zero IGST on Exports: Immediate tax exemption on all supplies that are made out of India.
• Improved Liquidity: There is still money available for purchasing, production, and transport.
• Faster Export Operations: LUT is recognised as a tax-free export by customs and banks.
• Reduced Compliance Cost: Minimises long procedures and forms for refunds.
• Ease of Doing Business: Helps the exporters and makes India more competitive in the world in terms of exports.

Notable Compliance Conditions

Exporters who exploit LUT should adhere to some regulations:

1. Goods should be exported within 3 months of the invoice date.
2. For services, payment must be made in convertible foreign exchange.
3. IGST is liable to be paid with interest in case of non-compliance.
4. The audit of all the export documentation should be kept.

Conclusion

The usual GST provision that can be described as potent is the Letter of Understanding (LUT), which provides total tax exemption to exporters and makes exporting goods to the market more cost-effective and compliant. By filing the LUT annually, exporters can avoid paying IGST, avoid cash flow blockages, and simplify cross-border trade. LUT is necessary whether you are a manufacturer, merchant, exporter, or service exporter, to get the best out of GST and ensure a smooth export process.