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January 30, 2021

Should Exporters go for LUT or not to get maximum GST ITC Benefits?

by CA Shivam Jaiswal in GST

Should Exporters go for LUT or not to get maximum GST ITC Benefits?

Every country in the world is trying to earn a share in the global trade. This is due to the lowering of trade barriers since the inception of the World Trade Organisation (WTO), increased import bills, and increased global competition in the domestic market.

Exporters should always ensure that he is aware of all regulations related to exports including registration procedure, compliances in terms of current taxation policy of the Government and do’s and don’ts for availing the benefits via schemes and refunds of taxes paid thereon. If such regulations are not adhered to, it may lead to difficulty in exports or denial of precious export incentives.

How are exports treated under GST?

As per the provisions contained under IGST law, export of goods or services or both are to be regarded as “zero-rated supplies” and a person being a registered taxable person exporting such goods or services or both shall be allowed to claim the refund of the GST paid under one of the following two options:

  • Export of goods or services or both under bond or letter of undertaking (LUT) without paying any Integrated Tax and can claim the refund of unutilized input credit.
  • Export of goods and service or both on the payment of Integrated Tax and the exporter can claim the refund of the GST paid on such goods and services so exported.

The above-mentioned refunds will be subject to certain rules, procedures, and safeguards as may be prescribed. Let us learn what these two options actual entail.

Export with Letter of Undertaking (LUT)

  • A LUT is a document that exporters can file to export goods or services without having to pay taxes.
  • LUT has to be filed /submitted online before exporting the goods/services in case an exporter wants to export without payment of taxes.
  • It can be applied for a financial year and need to be re-applied for every financial year.
  • This is one of the best mechanisms by which an exporter can restrict its cash flow situation.
  • However, any person who has been prosecuted for tax evasion for an amount of Rs. 2.5 crore or above under the act is not eligible to furnish LUTs, instead bonds should be furnished if the export is being made without payment of IGST.

How is refund to be claimed when export is made with LUT?

  • Refund can be claimed of unutilized ITC balance
  • Refund can be claimed after receipt of export proceeds in Foreign currency
  • Refund in the proportion of Exports Turnover to Total Turnover
  • Refund shall be claimed within 2 years

Export without Letter of Undertaking (LUT)

  • It means Export with payment of tax
  • GST to be charged on Exports
  • Such GST to be paid using ITC balance/ Cash
  • Export details like Shipping bill no, Port code, SB date to be updated correctly in GSTR-1

How is refund to be claimed when export is made without LUT?

  • Refund to be claimed of GST paid on exports
  • For Goods, auto refund will be processed once GSTR 1 is filed with correct details
  • For Services, refund form (RFD-01) to be submitted on GST portal
  • Refund shall be claimed within 2 years

Let us understand these options with the help of an example:

Scenario 1 – Situation where there is sufficient ITC balance

 LUT CaseNon – LUT Case
Export Turnover (a)125,000.00125,000.00
Domestic Turnover (b)225,000.00225,000.00
Total Turnover (c)350,000.00350,000.00
ITC Balance (d)50,000.0050,000.00
GST Liability (e)40,500.00 (18% on Domestic Turnover)63,000.00
Cash Payment to be made13,000.00
Refund to be applied3,392.86 [(d)-(e)] * (a)/(c)
Cash outflow for exports13,000.00
Cash inflow for exports3,392.8622,500.00
Net Cash Inflow3,392.869,500.00

There is encashment of ITC for Rs 9,500 in Non LUT case and Rs 3,393 in LUT case. Hence, it is beneficial to opt for Non LUT option.

Scenario 2 – Situation where there is Nil ITC balance to offset GST Liability

 LUT CaseNon – LUT Case
Export Turnover125,000.00125,000.00
Domestic Turnover225,000.00225,000.00
Total Turnover350,000.00350,000.00
ITC Balance30,000.0030,000.00
GST Liability40,500.0063,000.00
Cash Payment to be made10,500.0033,000.00
Refund to be appliedRefund cannot be applied since full ITC is utilised22,500.00
Cash outflow for exports022,500.00
Cash inflow for exports22,500.00
Net Cash Inflow

The cash inflow is equal to outflow under Non LUT case with no additional benefits over LUT Case. Hence, it is beneficial to opt for LUT option as it will not lead to block of funds

Thus, it is advisable to opt for Export without payment of Tax under LUT, only when there is Nil ITC balance to offset GST liability on exports and entire GST liability on exports is required to be paid in cash. In vice versa case, it is advisable to opt for Export with payment of tax (Non-LUT case). It will help to encash the unutilized ITC balance.

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