LETTER OF UNDERTAKING (LUT): A MUST-HAVE FOR EXPORTERS

LETTER OF UNDERTAKING (LUT): A MUST-HAVE FOR EXPORTERS

 In international trade, the letter of undertaking (LUT) is vital. Exporters use it to skip IGST payments. Importantly, it’s mandatory. The LUT works as a guarantee between banks. Importer’s bank supports the exporter’s bank. This trust transcends borders. According to the Central Goods and Services Act 2017, filing an LUT is obligatory for all exporters. This enables GST refunds. Once filed, it remains valid for the financial year. So, exporters avoid repetitive procedures. This article will further explore the LUT’s role, benefits, and acquisition process, shedding light on its significance in the export trade landscape. Join us on this journey to unlock the potential of the Letter of Undertaking in global commerce.

Contents

What exactly is the letter of undertaking (LUT)?

The CGST Act of 2017 mandates exporters to submit a  letter of undertaking for tax-free exports, bypassing IGST. Traditional exports incur taxes. However, India’s GST rules allow businesses to apply for an LUT with the GST department, seeking tax refunds.The essence lies in the LUT within Form GST RFD 11’s annexure. By submitting it, exporters commit to fulfilling all GST obligations while exporting, avoiding IGST payment. Once accepted by the GST department, this declaration liberates exporters from paying taxes on exports, preventing fund lockup in tax payments.The LUT serves as a passport for Indian exporters, enabling seamless global trade by relieving tax burdens and optimizing financial resources. In the following sections, we’ll delve into the LUT’s intricacies, its functions, and the steps to obtain one, emphasizing its pivotal role in international commerce.

What are the checklists for getting a letter of undertaking?

  1.     Export Location Flexibility:

Exporters can obtain an LUT for exports conducted both within and outside India. It extends to exports from places within Special Economic Zones (SEZs) as well.

2.  GST Registration Prerequisite:

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Exporters must be registered taxpayers under the GST framework. Additionally, the goods or services earmarked for export should also be registered under GST.

3.      Eligibility Criteria:

To qualify for a LUT, exporters must not have been prosecuted under the CGST Act, 2017 or IGST Act, 2017 for tax evasion exceeding Rs. 2.5 crore.

4.    Letterhead Registration:

The LUT submission should be on the exporter’s official letterhead that is registered under the GST.

5.      Signatory Authority:

If the exporter is a company, the LUT must be digitally signed by an authorized signatory. This could be a partner, company secretary, managing director, or any individual duly authorized by the company.6

6.      Adherence to LUT Terms:

Exporters must strictly adhere to the tax payment terms specified in the LUT. Failure to do so may lead to the revocation of the privilege to export without IGST payment.

7.    Annual Renewal:

An LUT is valid for a single financial year. Consequently, exporters must generate a fresh LUT each financial year to ensure continuous access to the benefits it offers.

What is the procedure for filing letter of undertaking?

   1. GST Portal Login:

Begin by logging in to the GST Portal, which is your online gateway for various GST-related activities.

   2.  Access User Services:

Navigate to the ‘SERVICES’ tab, then click on ‘User Services.’ From there, select ‘Furnish Letter of Undertaking (LUT).

      3. Choose Financial Year:

In this step, pick the relevant financial year from the provided ‘LUT Applied for Financial Year’ drop-down list.

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     4. Complete LUT Form:

Fill in all the necessary details in the ‘Letter of Undertaking Form/GST RFD-11.’ Ensure accuracy and completeness.

       5. Specify Filing Location:

Indicate the ‘Place of filing,’ then click ‘Save.’ Afterward, click ‘Preview’ to review the form’s correctness.

       6. Submission with Signature:

Sign and submit the form using either a Digital Signature Certificate (DSC) or Electronic Verification Code (EVC).

     7. Acknowledgement Download:

To complete the process, click the ‘Download’ button to obtain the acknowledgement of your submitted Letter of Undertaking.

What are the advantages of having a letter of undertaking?

     1. Facilitating Tax-Free Exports to SEZs:

Exporters to Special Economic Zones (SEZs) can avail zero-rated supplies under GST. This means they can export goods or services without paying Integrated Goods and Services Tax (IGST) by submitting the LOU along with their supplies.

     4. Tax Refunds for Raw Material Inputs:

GST paid on raw materials used for goods or services supplied to SEZs can be claimed as a refund. For instance, if an exporter ships shoes to China, they can claim a tax refund for the sole’s tax payment. Two methods exist for claiming this refund:

  •         Including a letter of undertaking while supplying and claiming the refund.
  •         Paying IGST before supplying and claiming the refund afterward.

      3.  Extended Validity for Simplified Compliance:

Once filed, the LOU remains valid for a year, corresponding to one financial year. This eliminates the need for exporters to apply for it every time they have an export consignment, reducing administrative burden.

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    4. Capital Liberation through Tax Exemption:

By utilizing the LOU, exporters are exempt from immediate tax payments. This means they don’t have to tie up their capital by paying taxes upfront and waiting for refunds, thus freeing up resources for other business needs.

How does this LUT works?

  1.     Importing Goods: X in Chennai intends to import Rs 5 lakhs worth of raw materials from Y in Singapore.
  2.     Payment Challenge: X faces difficulty due to the absence of a Singaporean bank account.
  3.     LOU Request: X requests SBI in Chennai to issue an LOU favoring ICICI Bank in Singapore.
  4.     LOU Transmission: SBI informs ICICI Bank in Singapore, ensuring payment assurance.
  5.     Funds Transfer: ICICI Bank transfers Rs 5 lakhs to an SBI-held Nostro account.
  6.      Payment and Receipt: X accesses the credit, pays Y, and obtains the materials.
  7.     Repayment: X repays Rs 5 lakhs to SBI in Chennai, which forwards it to ICICI Bank.
  8.     Risk Assessment: SBI evaluates X’s financial stability and may demand collateral.
  9.      LOU Assurance: The bank issues the LOU, guaranteeing payment to the foreign bank.

Summary – The letter of undertaking is a powerful tool that streamlines global trade. It enables tax-free exports, simplifies compliance, and expedites refunds.Platforms like Amazon Global Selling play a vital role in this international trade landscape. By utilizing the LOU, businesses can confidently scale their operations on Amazon Global Selling, accessing a vast global customer base and navigating global trade complexities with ease. Understanding and leveraging the LOU can be the key to realizing your global business potential, particularly when partnering with platforms like Amazon Global Selling.