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GST on Export of Services: Decoding LUT vs. IGST Payment for Your Global Business

Hey business owners! Are you providing services to international clients? If yes, then you're dealing with 'export of services' under GST. Navigating the Goods and Services Tax for these transactions can feel a bit like choosing between two different paths: should you use a Letter of Undertaking (LUT) or pay IGST and then claim a refund? Let's demystify this for you, so you can focus on growing your global business without GST headaches!

What Exactly is 'Export of Services' Under GST?

First off, what exactly counts as 'export of services' under GST? Simply put, it's when you provide services from India to a recipient located outside India, the place of supply is outside India, and you receive payment in convertible foreign exchange. This is a 'zero-rated' supply, meaning the government intends for exports to be tax-free to make Indian services competitive globally.

Option 1: The LUT Advantage (No Tax Outflow)

The most popular and often preferred method for exporters is exporting under a Letter of Undertaking (LUT). When you opt for this, you essentially give an undertaking to the government that you will comply with all GST provisions. The biggest advantage? You don't have to pay any IGST on your export services! You can simply utilize your accumulated Input Tax Credit (ITC) for other domestic supplies or claim a refund of unutilized ITC. This significantly saves your working capital from getting blocked, making it a smoother cash flow option.

Option 2: Pay IGST and Claim Refund (Working Capital Blocked)

Your second option is to pay the Integrated Goods and Services Tax (IGST) on your export services at the time of supply. While this might seem counter-intuitive for a zero-rated supply, it's a valid path. After paying the IGST, you then file a refund claim for the amount paid. The drawback here is that your working capital gets blocked for a period until the refund is processed and credited back to your account. This method is generally chosen by businesses that might not have a regular export volume or prefer the refund mechanism.

Which Path Should You Choose?

So, LUT or IGST payment for your export of services? For most regular exporters of services, opting for an LUT is the smarter choice. It ensures your working capital isn't tied up in tax payments and subsequent refunds, making your cash flow smoother. The process to file an LUT is also straightforward and can be done online. However, if you're an infrequent exporter or don't mind the refund process, paying IGST and claiming a refund is a viable alternative.

Understanding these two options for GST on export of services is crucial for seamless international business operations. Choose the path that best suits your business model and financial flow. If you need assistance with LUT filing or refund claims, remember, we're here to help you navigate the complexities of GST!

FAQs
Exporting with an LUT (Letter of Undertaking) allows a business to export goods or services without paying any IGST upfront. This is a crucial method for maintaining working capital. Exporting with IGST payment means the business pays the tax first and then claims a refund from the government.
The LUT option is best for exporters who want to avoid blocking their working capital in tax payments. This is especially beneficial for high-volume or frequent exporters. However, they must meet certain conditions, such as having a good compliance history.
The IGST payment option is often preferred by businesses that want a faster and more predictable refund process. The refund of IGST on exports is typically automated and system-driven, often processed within a few weeks, which provides quick liquidity.
You must file Form GST RFD-11 annually on the GST portal. This is a straightforward online process where you provide details of your business, and it is valid for one financial year. You must file a new LUT for each financial year.
The process is largely automated. The shipping bill filed by an exporter is treated as a refund application. The GST portal automatically shares the details with the Customs system, which processes the refund directly to your bank account if the data matches.
The key benefits of the IGST payment route include: 1. Faster and more automated refunds, reducing human intervention. 2. Better cash flow management due to quick liquidity. 3. Fewer refund rejections as the process is linked directly to Customs data.