Exporters in India face a fundamental choice: pay IGST on exports and claim a refund, or export without paying IGST under a Letter of Undertaking (LUT) or Bond. The LUT route preserves working capital, but it is not available to all exporters. Choosing the wrong route ā or filing the LUT late ā can result in demands for IGST payment, interest liability, and blocked refunds.
This article explains both mechanisms and the critical eligibility conditions.
The Zero-Rating Promise
Exports are zero-rated supplies under GST. The policy intent is that exports leave India without any tax burden. However, to claim zero-rating without paying IGST upfront, the exporter must file a Letter of Undertaking (LUT) in Form GST RFD-11 under Rule 96A.
Letter of Undertaking (LUT)
An LUT is a self-declaration by the exporter promising to comply with GST rules. It requires no financial collateral and preserves working capital entirely.
- Eligibility: All registered GST taxpayers are generally eligible.
- Exclusion: Exporters prosecuted for offences under CGST/IGST Act where tax evaded exceeds ā¹2.5 crore cannot furnish LUT.
- Validity: One financial year (April 1 to March 31). Must be renewed annually.
- Filing: Form GST RFD-11 on the GST portal before raising export invoices.
Bond Under GST
A Bond is required for exporters who are not eligible for LUT or who choose the bond route. It requires a bank guarantee, typically around 15% of the bond value, which blocks funds and impacts liquidity.
- Who must file: Exporters with tax evasion history exceeding ā¹2.5 crore, new exporters in some cases, or voluntary opters.
- Bank guarantee: A financial security that the government can invoke if the exporter defaults.
- Cost: The bank guarantee fee is a recurring cost that reduces export margins.
The Karnataka High Court Ruling
A critical judicial development addresses the consequence of late LUT filing. In M/s Prime Perfumery Works, the Karnataka High Court held that procedural lapses cannot defeat substantive export benefits. The court ruled that the LUT delay is curable, and refund cannot be denied merely because the LUT was furnished after the export. The CBIC Circular No. 37/11/2018-GST permits post-export furnishing of LUT.
Practical Decision Framework
- Most exporters: File LUT. It is simpler, free, and preserves working capital.
- Exporters with tax evasion history >ā¹2.5 crore: Must use Bond with bank guarantee.
- New exporters: May be asked to provide a bond if the Commissioner seeks additional assurance.
- Late LUT filing: Do not panic ā the Karnataka High Court has held that post-facto filing is acceptable, but file as early as possible.
Consequences of Non-Compliance
- Export without LUT/Bond: IGST becomes payable with interest from the date of export.
- Failure to realise proceeds: Export proceeds must be realised within 9 months. Non-realisation can convert the zero-rated supply into a taxable supply.
- Refund denial: While LUT delay is curable, refund claims can face scrutiny if documentation is incomplete.
Conclusion
The LUT is the preferred route for most exporters ā it is free, simple, and preserves working capital. The Bond route is mandatory only for exporters with a history of serious tax offences. The Karnataka High Court has confirmed that procedural delays in LUT filing do not defeat the substantive zero-rating benefit.
At Anuj Desai & Associates, we provide expert advisory services on export GST compliance, LUT filing, and refund claims. Our team can help you choose the right route and maximise your refund.
For a confidential consultation, contact us at office@anujdesaiassociates.com or call 9619456656. Visit our website at https://anujdesaiassociates.com or connect with our founder on LinkedIn at linkedin.com/in/ca-anuj-desai-122547230.