One of the fundamental principle to make exports competitive in the international market is that taxes should not be exported. Hence exports to destinations outside India as well as supplies to SEZ have been “zero rated”. Under GST, either exports can be made with LUT (without payment of tax) or it can be made without LUT (with payment of taxes). Comparison between both the options is explained below:
PARTICULARS | EXPORT WITH LETTER OF UNDERTAKING(LUT) | EXPORT WITHOUT LUT |
Meaning | It means Export without payment of tax.
| It means Export with payment of tax |
Validity | LUT is valid for 1 year and must be renewed every year over GST Portal.
| Not Applicable |
How it works? | – LUT to be applied at the start of the year on GST portal – No GST to be charged on Exports – Invoice to contain words “Exports under LUT” – Invoice to contain LUT acknowledgement no. – No payment of taxes is required on such exports
| – 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 |
Refund Process | – 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
| – 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’s discuss different scenarios when one should opt for exports with LUT or without LUT:
PARTICULARS | CALCULATIVE | SCENARIO 1 | SCENARIO 2 | |
a | Export Turnover |
| ₹1,00,000 | ₹1,00,000 |
b | Domestic Turnover |
| ₹2,00,000 | ₹2,00,000 |
c | ITC Balance |
| ₹ 20,000 | ₹ 40,000 |
LUT Case (without payment of tax) | ||||
d | GST Liability | (b*18%) | ₹36,000 | ₹36,000 |
e | Cash Payment to be made | (d-c) | ₹16,000 | – |
f | Refund to be applied for | (c-d)*a/(a+b) | Refund can’t be applied since full ITC is utilised | ₹ 1,333 |
g | Cash Outflow for Exports |
| – | – |
h | Cash Inflow for Exports |
| – | ₹ 1,333 |
i | Net Cash inflow |
| – | ₹ 1,333 |
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Non LUT Case (with payment of tax) | ||||
j | GST Liability | [(a+b)*18%] | ₹ 54,000 | ₹ 54,000 |
k | Cash Payment to be made | (j-c) | ₹ 34,000 | ₹14,000 |
l | Cash Outflow for Exports | (k-e) | ₹18,000 | ₹14,000 |
m | Cash Inflow for Exports (Auto Refund) |
| ₹18,000 | ₹18,000 |
n | Net Cash inflow |
| – | 4,000 |
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Decision |
| 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 | There is encashment of ITC for ₹4,000 in Non LUT case and ₹1,333 in LUT case. Hence, it is beneficial to opt for Non LUT option. | |
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.
Authors
CA Shreyans Dedhia
Partner | shreyans.dedhia@masd.co.in
CA Prashant Taparia
Partner | prashant.taparia@masd.co.in
Kiwa Shah
Associate Consultant | kiwa.shah@masd.co.in