Exporting services without paying IGST: how the LUT works

Your company bills a client abroad for software work, design, consulting or support. The invoice goes out. Then the question lands on your desk: do we charge IGST on this, or not?

IGST is the integrated goods and services tax. The law treats an export of services as a "zero rated supply". That means the tax rate on it is effectively nil, but you still keep the credit on your own purchases. You have two ways to get there. This article is about the first one: exporting under a Letter of Undertaking, called an LUT. We also explain the second, so you can choose with open eyes.

First: is your supply really an "export of services"?

An LUT is only available for a zero rated supply. So start by testing whether your supply qualifies. The law defines "export of services" in five parts (s.2(6), Integrated Goods and Services Tax Act, 2017). All five must be true:

• The supplier is located in India.
• The recipient is located outside India.
• The place of supply of the service is outside India.
• The supplier has received payment in convertible foreign exchange, or in Indian rupees where the Reserve Bank of India permits it.
• The supplier and the recipient are not merely establishments of a distinct person (as explained in Explanation 1 to s.8 of the same Act).

The words "or in Indian rupees wherever permitted by the Reserve Bank of India" were inserted in the definition with effect from 1 February 2019 (Integrated Goods and Services Tax (Amendment) Act, 2018).

Condition 5 matters for group companies. Read Explanation 1 to s.8 of the IGST Act, 2017 with your facts before you assume that a foreign group entity qualifies.

We do not set out the place-of-supply rules here. Get condition 3 confirmed before you rely on the export treatment.

What the law lets you do today

Section 16 of the Integrated Goods and Services Tax Act, 2017 names an export of goods or services as a zero rated supply (s.16(1)(a)). It then gives the exporter two options (s.16(3)):

• Option A. Supply under a bond or a Letter of Undertaking, without paying integrated tax, and claim a refund of unutilised input tax credit (s.16(3)(a)).
• Option B. Supply on payment of integrated tax, and claim a refund of the tax paid (s.16(3)(b)).

In plain words. Under Option A you pay no IGST on the export, and the credit on your own purchases builds up for a refund. Under Option B you pay IGST first and get it refunded. Both refunds follow s.54 of the Central Goods and Services Tax Act, 2017.

Option A carries a promise: you give an undertaking to the government, and you must keep it. That is where the clocks come in.

The law also keeps your input credit alive. Credit of input tax may be used for making zero rated supplies, even though such a supply may otherwise be an exempt supply (s.16(2), IGST Act, 2017, subject to s.17(5) of the CGST Act, 2017).

What an LUT is

A "registered person" who wants to export without paying IGST must file an LUT or a bond before the export. The rule is clear on timing: "prior to export" (rule 96A(1), Central Goods and Services Tax Rules, 2017).

The undertaking is made in Form GST RFD-11, addressed to the jurisdictional Commissioner. In it you bind yourself to pay the tax due, along with interest under s.50(1) of the CGST Act, 2017, if you do not meet the time limits in the rule (rule 96A(1)).

The Board may specify the conditions and safeguards under which an LUT can be given in place of a bond (rule 96A(5)). A notification titled "extension of facility of LUT to all exporters" was issued as Notification No. 37/2017-Central Tax on 4 October 2017. We do not repeat its eligibility conditions here. Check the current conditions, and any exclusions, on the GST portal before you file.

The deadline clock: this is the part that bites

Rule 96A(1) sets two clocks. Which one applies depends on whether you supply goods or services. For a services exporter, the second one is yours.

The rule also has a three-month clock for goods (rule 96A(1)(a)). That is not the clock for a services company.

For services, you must pay the tax and the interest if you have not received payment for the services. The date to remember is fifteen days after the expiry of one year, or the period allowed under the Foreign Exchange Management Act, 1999, including any extension permitted by the Reserve Bank of India, whichever is later. It is counted from the date of issue of the invoice for export. The Commissioner can allow a further period (rule 96A(1)(b)).

Do not do the date maths from memory. Put the invoice date, the FEMA period and any RBI extension on a tracker for each invoice.

This one-year rule was changed in 2024. The wording "the period as allowed under the Foreign Exchange Management Act, 1999 ... including any extension of such period as permitted by the Reserve Bank of India, whichever is later" was substituted by Notification No. 12/2024-Central Tax dated 10 July 2024. Older guides may carry the earlier wording.

What happens if you miss the clock

Rule 96A(3) is direct. Where the export is not completed in the time specified and you do not pay the amount in sub-rule (1), the export as allowed under bond or LUT "shall be withdrawn forthwith". The amount is recovered from you in accordance with s.79 of the CGST Act, 2017.

The way back is also in the rule. The export allowed under LUT, once withdrawn, "shall be restored immediately when the registered person pays the amount due" (rule 96A(4)).

So there are two costs: the tax and interest itself, and the loss of the LUT route until you pay. Interest is charged under s.50(1) of the CGST Act, 2017, at a rate "not exceeding eighteen per cent." as notified by the Government on the Council's recommendation. The rate currently notified is not stated here. Check the current rate on the GST portal before you compute any amount.

Reporting the export on the GST return

Filing an LUT does not finish your reporting. The export invoice details you give in Form GSTR-1 (as amended in Form GSTR-1A, if any) are electronically sent to the Customs system (rule 96A(2)).

There is also a special rule for late returns. If the date for filing GSTR-1 for a tax period has been extended under s.37 of the CGST Act, 2017, you must furnish the export information in Table 6A of Form GSTR-1 after you have filed Form GSTR-3B. That information then gets auto-drafted into the GSTR-1 for the same tax period (provisos to rule 96A(2)).

Claiming the refund of accumulated credit

You exported without paying IGST. Your input credit sits unused. You can claim it back.

Section 54(3) of the CGST Act, 2017 allows a registered person to claim a refund of unutilised input tax credit at the end of any tax period. The first proviso limits refunds to specific cases, and the first of those is "zero rated supplies made without payment of tax" (s.54(3)(i)). That is your case.

One more condition. No refund of input tax credit is allowed if the supplier avails of drawback in respect of central tax, or claims refund of the integrated tax paid on such supplies (proviso to s.54(3) on drawback).

The application is made electronically in Form GST RFD-01 through the common portal (rule 89(1), CGST Rules, 2017). For services exported, the rule says the application for refund of integrated tax paid on services exported out of India is also filed in Form GST RFD-01 and dealt with under rule 89 (rule 96(9)). Rule 89 has the formula and documents. Read the current text and the portal's instructions before you file.

The refund time limit

You have two years. Section 54(1) says the application must be made "before the expiry of two years from the relevant date".

For services exported out of India, the "relevant date" is:

• the date you receive payment in convertible foreign exchange (or in Indian rupees where the RBI permits), where you completed the supply before the payment came in; or
• the date of issue of the invoice, where the payment came in advance, before the invoice (clause (c) of the Explanation to s.54, CGST Act, 2017).

So the two-year clock may start from payment, not from the invoice. Track both dates for each export invoice.

Step by step

• Test the supply. Run each of the five conditions in s.2(6) of the IGST Act, 2017. Pay particular attention to place of supply and to whether the foreign client is a separate person.
• Furnish the LUT before the first export in Form GST RFD-11 to the jurisdictional Commissioner (rule 96A(1)). Look up the portal's current steps and the conditions in Notification No. 37/2017-Central Tax, as amended.
• Issue export invoices without IGST, showing that the supply is under LUT.
• Report the invoices in Form GSTR-1 (rule 96A(2)). Where the GSTR-1 date has been extended, use Table 6A after filing GSTR-3B.
• Track payment. Record the invoice date, the receipt date and the mode of receipt for each invoice. Payment must come in convertible foreign exchange, or Indian rupees where the RBI permits (s.2(6)(iv), IGST Act, 2017).
• Watch the one-year clock (rule 96A(1)(b)). If an invoice is heading past it unpaid, decide what to do early.
• Claim the refund of unutilised credit in Form GST RFD-01 within two years of the relevant date (s.54(1) and clause (c) of the Explanation to s.54, CGST Act, 2017; rule 89(1)).

What not to do

• Do not export first and file the LUT later. The rule says "prior to export" (rule 96A(1)).
• Do not assume every foreign-facing invoice is an export. A branch of your own company abroad does not meet condition 5 of s.2(6).
• Do not ignore unpaid invoices. After the clock runs out, the facility is withdrawn and the tax is recovered (rule 96A(3)).
• Do not claim both ways. If you take drawback, or claim a refund of IGST on the same supply, the credit refund is barred (proviso to s.54(3) on drawback, CGST Act, 2017).

What to do now

Next step. Make a list of every export invoice you have issued under LUT that is still unpaid. For each, write the invoice date and the FEMA period. If you have no LUT on file for the current year, furnish one in Form GST RFD-11 before the next export (rule 96A(1), CGST Rules, 2017).

Deadline. For an unpaid services invoice, fifteen days after the expiry of one year from the invoice date, or the longer FEMA period with any RBI extension (rule 96A(1)(b)). For the refund, two years from the relevant date (s.54(1), CGST Act, 2017).

Consequence. If you miss the date, the LUT export is withdrawn and the tax is recovered with interest under s.79 and s.50(1) of the CGST Act, 2017 (rule 96A(3)). It is restored when you pay the amount due (rule 96A(4)).

Have a CA review your facts before you act or file.

Frequently asked questions

1. Is an LUT the same as a bond?
Both are routes under rule 96A(1) of the CGST Rules, 2017. The rule lets you furnish "a bond or a Letter of Undertaking" in Form GST RFD-11. The Board can set the conditions on which an LUT may be given in place of a bond (rule 96A(5)). Check the current conditions on the GST portal.

2. Can I use an LUT if my client pays in Indian rupees?
Only where the Reserve Bank of India permits payment in rupees. The definition of export of services accepts payment "in convertible foreign exchange or in Indian rupees wherever permitted by the Reserve Bank of India" (s.2(6)(iv), IGST Act, 2017). The rule on the one-year clock uses the same words (rule 96A(1)(b)).

3. Should I pay IGST instead and claim a refund?
The law allows it. Section 16(3)(b) of the IGST Act, 2017 lets you supply on payment of integrated tax and claim a refund of the tax paid. Your cash is tied up until the refund comes. Which option suits you depends on your cash flow and your facts. Raise it with your CA.

4. What if my foreign client pays late, after the one-year clock?
Pay the tax and interest before the clock runs out, or get a further period from the Commissioner (rule 96A(1)(b)). If you do not, the LUT export is withdrawn and the amount is recovered (rule 96A(3)). It is restored when you pay (rule 96A(4)).

5. Does an LUT mean I get no input credit?
No. You keep credit of input tax for making zero rated supplies (s.16(2), IGST Act, 2017). You claim the unutilised credit as a refund under s.54(3) of the CGST Act, 2017.

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See Also

• Refund of ITC stuck because we export: how to claim it
• ASMT-10 scrutiny notice: how to reply within 30 days
• We paid a foreign vendor for software/services — do we pay GST under reverse charge?