Exports Under GST: How to Use Bond or LUT? Exports are vital in any country’s economy, and in India, they are regarded as ‘zero-rated supplies’ under the GST provisions. This further means that exporters do not pay GST for overseas transactions. However, a certain level of documentation procedure must be completed, especially when deciding between using a Bond or Letter of Undertaking (LUT) for tax compliance. This article will explain how exporters can use LUT or Bond under GST, their advantages, who qualifies, and the detailed submission processes.
Understanding Exports Under GST According to Section 16 of the IGST Act of 2017, exports are considered a zero-rated supply. This allows exporters to:
Export goods/services by providing a LUT or Bond and not paying IGST.
Pay IGST on exports and receive a tax refund later on.
For those opting for the first method, tax outflow can be avoided only if an LUT or Bond is submitted. Now, let's look at the concepts and processes that differentiate and explain them.
What is a Letter of Undertaking (LUT)? A Letter of Undertaking (LUT) is an exporter’s pledge to the GST department related to the export regulation without payment of IGST. This document is known as an undertaking letter, meaning it’s a legally enforceable document; therefore, an exporter can use it for tax-free exports.
Eligibility for LUT: It is available to all registered taxpayers who deal with the export of goods and services.
The exporter should not have been convicted for tax default beyond Rs. 2.5 crores under the CGST Act, 2017.
Applicable to supplies made to Special Economic Zones (SEZs) free of tax.
Benefits of LUT: No obstruction of working capital, as there is no requirement to pay IGST before claiming an LUT.
Less complicated and inexpensive.
Results in less paperwork and less administrative work.
What is a Bond in GST? A Bond Under GST is needed when an exporter cannot furnish an LUT. It is a legal commitment on the part of the exporter to the government under whose jurisdiction the exporter falls, where the exporter declares that he/she will comply with all obligations related to export matters. A bond must be filed together with a bank guarantee as collateral to secure the obligation.
Who Should Submit a Bond? Exporters are not eligible for LUT submission.
Those tending tax default more than Rs. 2.5 crores.
Types of Bonds: Running Bond: A bond that may be used for more than one transaction until the bond's limit is reached.
Specific Bond: A bond relating to one single transaction only.
Disadvantages of Using a Bond: A bank guarantee is required, adversely impacting working capital.
More documents and steps than needed in a LUT.
How to Apply for LUT Under GST? Step-by-Step Process: Log in to the GST Portal: Visit www.gst.gov.in and log in with your credentials.
Navigate to LUT Application: Go to Services > User Services > Furnish Letter of Undertaking (LUT) .
Fill out the LUT Form
Select the financial year for which you are applying.
Enter details of the authorized signatory.
Upload the required supporting documents.
Self-Declaration and Submission: Accept the declaration and submit the form with a digital signature (DSC) or Electronic Verification Code (EVC).
Acknowledgment and Approval: The GST portal will generate an acknowledgment, and approval is granted automatically unless discrepancies arise.
How do you apply for a bond under GST? Step-by-Step Process: Design the Bond on Stamp Paper: Bonds must be drafted on a non-judicial stamp paper in the format laid out by the GST department.
Issue a Bank Guarantee: The exporter must now provide a bank guarantee, typically 15% of the bond value.
Deliver to Jurisdictional GST Office: Submission of the bond with attachments is done at the GST Commissioner’s office by the exporters.
Approval and Acceptance: The bond is now accepted after verification, allowing the exporter to export goods without paying IGST.
Comparison: LUT vs Bond Feature LUT Bond Eligibility All registered exporters Exporters ineligible for LUT Bank Guarantee Not required Required (usually 15%) Submission Mode Online via GST portal Physical submission to the GST office Processing Time Instant approval Takes additional time Financial Impact No fund blockage Blocks working capital
Common Mistakes to Avoid Letting LUT Expire Without Renewal: LUT expires every financial year, meaning it is only valid for one year and must be renewed yearly.
All Required Documentation Not Provided: Check LUT/Bond submission to ensure all necessary documentation is attached.
Not Tracking Approval Status: Log into the GST portal frequently to track the application's progress.
Export Documentation-Related Errors: Ensure that invoices and shipping bills reflect “Supply meant for export under LUT/Bond without payment of IGST.”
Conclusion When managing tax outflow and GST regulations, choosing a LUT instead of a Bond is more seamless and effective for exporters. However, some people are not eligible for LUT, and thus, bonds would be the only option. Knowing how to do things and submit documents on time properly will help exporters minimize steps and monetary loss.
By doing so, businesses will smoothly export their goods without any hassles related to GST reclaim. One must follow all the instructions given on the latest GST updates and remember that LUTs must be renewed yearly to prevent any exporting issues.
FAQs 1. Is LUT mandatory for all exporters? Exporters can file an LUT for tax-free exportation or pay IGST, which can be claimed as a refund.
2. What happens if an exporter does not furnish an LUT or Bond? Without an LUT or Bond submitted by the exporter, IGST is payable on exports with a claim for refund afterward.
3. How long is an LUT valid under GST? An LUT remains usable for one financial year and must be renewed yearly.
4. Can an exporter use one LUT for multiple exports? Absolutely. One LUT can be utilized for various export transactions throughout the fiscal year.
5. What is the validity of a bond under GST? The bond continues to be active until the export obligations are fulfilled or the limit of the bond value is exceeded.
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