Exports Under GST: How to Use Bond or LUT?

India’s ambition to be a global manufacturing and export hub is strongly supported by the Goods and Services Tax (GST) framework.

Understanding the intricacies of GST as it applies to exports is not just about compliance;

it’s about optimizing your working capital and ensuring a smooth flow of international trade.

This detailed guide from Disytax will provide an in-depth understanding of how exporters can utilize the Letter of Undertaking (LUT) and Bond mechanisms to export goods and services without the initial burden of GST payment.

At the heart of GST treatment for exports lies the concept of zero-rated supply.

According to the GST Act, exports of goods or services, or both, to a place outside India are classified as zero-rated supplies.

While these supplies are technically taxable, the effective GST rate is zero.

This strategic move by the government aims to make Indian exports more competitive globally by eliminating the cascading effect of taxes and ensuring that taxes are not exported.

As an exporter, recognizing your supplies as zero-rated opens up two primary pathways for handling GST:

1. Exporting Under a Letter of Undertaking (LUT) or Bond: This allows you to ship your goods or provide services internationally without paying the Integrated Goods and Services Tax (IGST) upfront. This is particularly beneficial for managing cash flow.
2. Exporting on Payment of IGST and Claiming a Refund: Alternatively, you can pay the applicable IGST on your export and subsequently claim a refund of the tax paid. While this ensures compliance, it can temporarily tie up your working capital.

How to export under GST without paying IGST upfront by utilizing either a Letter of Undertaking (LUT) or a Bond.

A Letter of Undertaking (LUT) is essentially a formal declaration furnished by an eligible exporter to the GST authorities.

In this document, the exporter commits to fulfilling all the prescribed conditions under the GST law for exporting goods or services without the payment of IGST.

Think of it as a promise of compliance.

The good news is that a wide range of GST-registered taxpayers involved in exporting can opt for an LUT.

However, there’s a crucial condition:

The exporter must not have been prosecuted for any tax evasion case involving an amount of ₹250 lakhs or more under the Central Goods and Services Tax Act, 2017 (CGST Act), the Integrated Goods and Services Tax Act, 2017 (IGST Act), or any other prevailing law.

If your business has a clean record concerning major tax evasion, you are likely eligible to choose the LUT route.

Obtaining an LUT is designed to be an efficient online process through the official GST portal.

Here’s a detailed, step-by-step guide to help you navigate:

1. Access the GST Portal: Begin by visiting the official GST portal (www.gst.gov.in) and log in using your valid GSTIN and password.
2. Navigate to the “Services” Section: Once logged in, locate and click on the “Services” tab on the portal’s main menu.
3. Select the “Refunds/Export” Option: Under the “Services” dropdown, find and click on the “Refunds/Export” section.
4. Choose “Furnish Letter of Undertaking (LUT)”: Within the “Refunds/Export” section, select the option that reads “Furnish Letter of Undertaking (LUT)”.
5. Select the Relevant Financial Year: You will be prompted to choose the financial year for which you intend to furnish the LUT. Select the appropriate year from the dropdown menu.
6. Complete the LUT Form (GST RFD-11): The online LUT form, officially known as GST RFD-11, will appear on your screen. Carefully fill in all the required details. This typically includes:
   • Exporter Details: Your basic GST registration details will be auto-populated. Verify their accuracy.
   • Witness Details: You will need to provide the names, addresses, and occupations of at least two independent witnesses. Ensure you have this information readily available.
   • Declaration: Read the declaration carefully, which confirms your commitment to comply with all GST regulations related to exports.
7. Upload Supporting Documents (If Required): While the online process is generally document-free, the portal might occasionally request specific documents based on your profile or specific circumstances. Ensure you have these scanned and ready for upload if prompted.
8. Submit the LUT: Once you have filled in all the necessary information and uploaded any required documents, you can submit the LUT. This can be done using your Digital Signature Certificate (DSC) or through Electronic Verification Code (EVC), depending on your registration type and preference.
9. Receive Acknowledgement: Upon successful submission, the GST portal will generate an acknowledgement receipt. It is crucial to download and save a copy of this acknowledgement for your records and future reference.

A Letter of Undertaking (LUT) furnished on the GST portal is generally valid for the entire financial year for which it is submitted.

If you plan to continue exporting without paying IGST in the subsequent financial year, you will need to furnish a fresh LUT at the beginning of that new financial year.

Opting for an LUT offers several compelling advantages for eligible exporters:

• Elimination of Upfront GST Payment: The most significant benefit is that you can export your goods or services without having to pay the IGST upfront, directly improving your cash flow.
• Simplified and Streamlined Procedure: The online process of obtaining an LUT is generally quick, easy, and less bureaucratic compared to executing a bond.
• No Requirement for Security or Surety: Unlike a bond, an LUT does not necessitate providing any form of security, such as a bank guarantee or cash deposit, freeing up your financial resources.

A Bond, in the context of GST exports, is a legally binding agreement between the exporter and the GST authorities.

In this agreement, the exporter provides a surety or security, promising to pay the IGST due on the exported goods or services if they fail to meet the conditions stipulated under the GST law.

A Bond is primarily required in situations where an exporter does not meet the eligibility criteria for furnishing an LUT.

The most common scenario is when the exporter has been prosecuted for tax evasion cases amounting to ₹250 lakhs or more.

In such instances, the GST authorities may require the exporter to execute a bond to ensure compliance.

Executing a GST export bond involves a more formal and often lengthier process compared to obtaining an LUT.

Here’s a detailed breakdown of the steps involved:

1. Preparation of the Bond Document (GST RFD-11): The bond needs to be prepared on non-judicial stamp paper of the prescribed value, which varies depending on the state. The format for the bond, which is also GST RFD-11 (same form as LUT but with different sections), is available for download on the GST portal.
2. Provision of Security or Surety: This is a crucial step in executing a bond. The exporter is required to provide security or a surety to the satisfaction of the jurisdictional GST officer. Acceptable forms of security can include:
   • Bank Guarantee: A guarantee from a recognized bank for the amount of the estimated IGST liability.
   • Cash Deposit: Depositing the equivalent amount in cash with the GST authorities.
   • Surety Bond: An undertaking from a third party (surety) to pay the IGST if the exporter defaults.

   The specific type and amount of security required will be determined by the jurisdictional GST officer based on factors like the exporter’s history and the value of exports.

3. Submission of the Bond to the Jurisdictional GST Officer: Once the bond document is prepared and the security/surety is arranged, the exporter needs to submit the executed bond along with the relevant security documents to their jurisdictional GST officer. This is an offline process.
4. Verification and Acceptance by the GST Officer: The jurisdictional GST officer will thoroughly verify the bond document and the provided security/surety. They may also require additional information or clarifications.
5. Issuance of Bond Acceptance: If the GST officer is satisfied with the documents and the security, they will issue an acceptance letter or a similar confirmation, along with a unique bond number. This acceptance is essential for proceeding with exports without upfront IGST payment.

Choosing the bond route comes with its own set of pros and cons:

Advantages:

Option for Ineligible Exporters: It provides a crucial pathway for exporters who do not meet the eligibility criteria for an LUT to still export their goods or services without paying IGST upfront.

Disadvantages:

Requirement for Upfront Security or Surety: The necessity of providing security or a surety can significantly impact an exporter’s working capital, as it involves tying up funds or incurring costs associated with obtaining a bank guarantee.

More Complex and Lengthy Procedure: Executing a bond involves more paperwork, physical submissions, and approvals from the GST officer, making it a more time-consuming and potentially cumbersome process compared to the online LUT.

Potential Financial Costs: There might be direct costs associated with obtaining a bank guarantee or engaging a surety.

To provide a clearer understanding, here’s a table summarizing the key differences between LUT and Bond:

The decision of whether to opt for an LUT or a Bond largely hinges on your business’s eligibility.

If you meet the criteria for furnishing an LUT, it is generally the preferred choice due to its simplicity, speed, and lack of security requirements.

However, if your business has a history of significant tax evasion, you will likely be required to execute a Bond.

In such cases, carefully assess the implications of providing security, the procedural complexities, and the potential costs involved before making your decision.

Regardless of whether you choose the LUT or Bond route, it’s vital to adhere to the following important considerations and compliance requirements:

• Timely Furnishing/Execution: Ensure that the LUT is furnished online or the Bond is executed and accepted by the jurisdictional GST officer before you undertake any zero-rated supply (export).
• Adherence to Conditions: Exporters operating under an LUT or Bond must strictly comply with all the conditions stipulated under the GST law. This includes accurate and timely filing of GST returns (GSTR-1 and GSTR-3B) and maintaining proper records of your export transactions.
• Intimation to Customs Authorities: When exporting goods, you will need to declare on the export documents (such as the shipping bill) that the export is being made under an LUT or Bond, along with the specific LUT/Bond number.
• Realization of Export Proceeds: A key condition under both LUT and Bond is the realization of export proceeds in freely convertible foreign currency within the time frame prescribed by the Reserve Bank of India (RBI). Failure to do so can lead to the revocation of the LUT/Bond and potential tax liabilities.
• Refund of Unutilized Input Tax Credit (ITC): Even if you are exporting under an LUT or Bond without paying IGST, you are still eligible to claim a refund of any unutilized Input Tax Credit (ITC) accumulated on the inputs and input services used in the exported goods or services. This refund can be claimed by filing Form GST RFD-01A.

Exporters should be aware of some common pitfalls to avoid:

• Delay in Furnishing LUT/Executing Bond: Failing to have the LUT in place or the Bond accepted before the export can lead to complications and potential tax demands.
• Incorrectly Filling the LUT/Bond Form: Ensure all details, especially witness information, are accurate.
• Non-Compliance with Conditions: Failing to realize export proceeds within the stipulated time is a common reason for LUT/Bond revocation.
• Not Intimating Customs: Properly declaring the LUT/Bond on export documents is essential for smooth customs clearance.
• Forgetting to Renew LUT: Remember to furnish a fresh LUT at the beginning of each financial year if you continue to export without paying IGST.

Navigating the complexities of GST on exports can seem daunting, but understanding the mechanisms of the Letter of Undertaking (LUT) and the Bond is crucial for ensuring a smooth and efficient export process.

By choosing the right option based on your eligibility and diligently adhering to the compliance requirements, you can significantly optimize your cash flow and enhance your competitiveness in the global market.

At Disytax, we are dedicated to empowering businesses with the knowledge and resources they need to navigate the intricacies of GST and other tax regulations.

If you have any further questions or require expert assistance with your export-related GST matters, our team of experienced professionals is here to help.

Contact us today for personalized guidance and support.