Exports Under GST: Understanding Bonds and LUTs for Tax-Free Exports

Between April and September 2024, India’s exports reached an estimated $393.22 billion, reflecting a 4.86% growth compared to $375 billion during the same period in 2023.

This growth comes amid evolving global trade dynamics, including potential opportunities arising from U.S. tariffs on China, Mexico, and Canada, which could position India as a stronger player in the global export market​.

For exporters, understanding GST mechanisms like Bonds and Letters of Undertaking (LUTs) is important to maximize benefits while maintaining compliance.

Let’s see how these tools work for tax-free exports under GST.

What’s a Bond or LUT in GST, and Why Does It Matter?

Under GST, exports are considered zero-rated supplies, meaning no GST is charged on the exported goods or services. But to claim this benefit, exporters must either:

1. Furnish a Letter of Undertaking (LUT), or
2. Execute a Bond with the government.

What is an LUT?

An LUT is a legal promise made by the exporter to the government.

By furnishing an LUT, you declare that you’ll export goods or services within the stipulated time frame without paying IGST (Integrated Goods and Services Tax).

LUTs are cost-effective and paperless, making them a preferred choice for eligible exporters.

What is a Bond?

A Bond is another way to ensure tax-free exports. Unlike a LUT, a Bond requires a bank guarantee as security.

It’s typically used by exporters who don’t qualify for an LUT due to compliance issues or other reasons.

Both options allow exporters to ship goods and claim input tax credit (ITC) without the burden of paying GST upfront.

Why Choose a Bond or LUT?

Exporters often operate on tight margins. Paying GST upfront and waiting months for refunds can disrupt cash flow. Choosing the right option ensures:

1. Smooth cash flow: No upfront tax payment means funds can be used elsewhere.
2. Faster processing: LUTs, especially, are processed quickly.
3. Legal compliance: Avoiding fines or penalties for non-compliance.

What to Choose Between a Bond and LUT ?

The choice depends on your business’s compliance history and export volume.

• Use an LUT if:

  • You’re a GST-compliant exporter.
  • You’ve not been prosecuted for tax offenses exceeding ₹250 lakhs in the last five years.

• Use a Bond if:

  • You’re a new exporter or have compliance issues.
  • You can provide a bank guarantee.

For instance, a small textile exporter with a clean GST history can file a LUT, while a large-scale exporter with pending dues might need to execute a Bond.

Step-by-Step Guide to Filing an LUT

The good news? The LUT application process is simple and entirely online. Follow these steps:

Step-1: Log in to the GST Portal

Head to the GST website and log in using your credentials.

Step-2: Navigate to "Furnish LUT"

Click "User Services," beneath the "Services" tab, and then choose "Furnish LUT."

Step-3: Fill in Details

Complete the form with details like:

• GSTIN
• Name of the authorized signatory
• Details of exports.

Step-4: Upload Supporting Documents

Attach necessary documents, including:

• GST registration certificate
• PAN of the entity
• Previous export records (if applicable).

Step-5: Submit and Download Acknowledgment

Once submitted, download the confirmation for your records. The validity of an approved LUT is one fiscal year.

Step-by-Step Guide to Executing a Bond

Filing a Bond is slightly more complex because it involves offline submission.

Step-1: Prepare the Bond

Draft a Bond using Form RFD-11. Make sure the information follows the format required by the GST regulations.

Step-2: Calculate the Bank Guarantee

The bond amount is typically equal to the tax liability on your projected exports. You’ll also need to provide a bank guarantee (usually 15% of the bond amount).

Step-3: Submit at the GST Office

Visit your jurisdictional GST office and submit:

• The executed Bond.
• Bank guarantee documents.
• RFD-11 form.

The office will verify and approve your Bond.

Compliance After Submission

Once your Bond or LUT is approved, follow these practices to stay compliant:

1. File GSTR-1: Mention export invoice details in your returns.
2. Track Export Timelines: Exports under LUT/Bond must happen within three months of issuing the invoice.
3. Maintain Records: Keep a record of all export-related documents for audits.

Failing to meet these obligations could lead to penalties or forfeiture of your bank guarantee.

GST on Export of Goods and Services

Exports are zero-rated under GST, meaning exporters can claim ITC on input costs. Here’s how GST applies to exports:

• Exports under LUT/Bond: No GST is charged.
• Exports with GST Payment: You can pay IGST and later claim a refund.

What about the GST rate on exports under LUT? It’s 0%, making LUT the simplest option for eligible exporters.

For exporters, understanding the differences of Bonds and LUTs is critical to ensuring hassle-free operations.

While LUTs are easier and more cost-effective, Bonds remain an alternative for businesses with unique needs.

Challenges Exporters May Have to Face

While Bonds and LUTs simplify GST compliance, exporters often face these challenges:

1. Application Delays: Approval may be slowed down by inaccurate or lacking forms.
2. Complex Processes for Bonds: Small businesses may find the bank guarantee requirement burdensome.
3. Errors in Returns: Mistakes in GSTR-1 filings can invite scrutiny.

Managing GST compliance for exports can be tricky, but tools that automate filings and reconciliations make the process easier.

We help in GST Reconciliation, tracking GST filing, saving you time, and reducing errors. For exporters, having such support can be a helping hand in staying focused on business growth. We aim to restore India's accounting practices as the foundation for global economic standards. Try us today.

You May Find This Useful:

1. GST on Imports and Exports: A Comprehensive Guide
2. From India to the World: Simplifying EOU Registration Under IGCR