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LUT vs. IGST Payment: Which GST Route Should Indian Service Exporters Choose?

Indian service exporters who qualify for zero-rating can use LUT without paying IGST or pay IGST and claim a refund. The right choice depends on eligibility, cash flow, ITC and compliance readiness.
From TheFinanceBase Team4 min to read

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For an Indian service exporter whose supply qualifies as an export under GST law, the choice is between exporting under a Letter of Undertaking (LUT) without paying IGST and paying IGST on the export and claiming a refund. LUT avoids funding that tax upfront, while the refund under that route is for eligible unutilized input tax credit (ITC); the payment route requires upfront tax and seeks a refund of the IGST paid. Neither route is automatically better, and the export tests must be met before either can apply.

First confirm that the service qualifies as an export

A service supplied to a customer outside India is not automatically an export for GST purposes. Check the statutory export-of-services conditions against the actual arrangement, including where the supplier and recipient are located, the applicable place-of-supply rule, whether the parties are establishments of the same person, and how consideration is received. The two zero-rated supply routes in section 16 of the IGST Act apply only if the supply qualifies. CBIC’s IGST Act, section 16

Pay particular attention to intermediary services and cross-border transactions between related establishments. CBIC’s sectoral FAQ gives examples in which these arrangements do not meet the export tests; the outcome depends on the facts and the applicable law, not simply on the customer’s foreign address. CBIC sectoral FAQs

How the two routes differ

Decision point LUT or bond, without IGST Pay IGST and claim a refund
Tax paid at export No IGST is paid on the qualifying zero-rated supply under this route. IGST is paid on the supply.
Refund sought Refund of eligible unutilized ITC, subject to applicable law and procedure. Refund of the IGST paid, subject to applicable law and procedure.
Cash-flow effect Avoids funding IGST upfront; any ITC refund still depends on eligibility, records and processing. Requires funding IGST while the refund claim is processed.
Main compliance step Furnish a bond or LUT in Form GST RFD-11 before export and retain invoice and remittance records. Report the export, pay tax and make the applicable refund claim with supporting documents.
Service payment condition Rule 96A sets a one-year period from the export invoice date for receipt in convertible foreign exchange, unless the Commissioner allows further time. The cited official materials do not establish a universal service-export refund-processing timeline.
Key limitation A valid LUT does not itself prove export eligibility or make all ITC refundable. Paying IGST does not cure a failure to meet export conditions or guarantee a refund.

Section 16(3) of the IGST Act provides the statutory choice: a qualifying zero-rated supply may be made under bond or LUT without payment of integrated tax, with a claim for refund of unutilized ITC, or on payment of integrated tax, with a claim for refund of that tax. CBIC’s IGST Act, section 16

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When the LUT route may suit your cash flow

Consider LUT or bond when avoiding an upfront IGST outlay matters and you have eligible ITC for which a refund claim is relevant. This route changes the refund basis; it does not mean that every credit balance is refundable. The applicable refund rules govern the claim and calculation. CBIC refund rules

LUT is not paperwork-free. Rule 96A calls for the bond or Letter of Undertaking in Form GST RFD-11 before export. Keep the export invoices and evidence of payment, and monitor whether service proceeds arrive within the required period. CGST Rules, Rule 96A

When paying IGST may fit the facts better

The payment route means funding IGST on the export and then seeking a refund of the tax paid. To compare it sensibly with LUT, assess the amount of tax that would need to be funded, the expected refund documentation and reconciliation work, and the business’s capacity to carry the cash while a claim is processed. The route is a statutory option, not a way to bypass export eligibility requirements.

The available official sources establish different refund bases and compliance steps, but do not establish that IGST-paid claims are universally faster or more reliable than LUT-route ITC refunds. Do not choose on the assumption of a guaranteed processing time.

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Meet the payment and refund-record requirements

Track the service-payment period under LUT

Under Rule 96A, payment for services exported under bond or LUT must be received in convertible foreign exchange within one year from the export invoice date, or within further time allowed by the Commissioner. If payment is not received within the applicable period, the rule requires payment of tax due with applicable interest. Treat the period as a rule-specific condition, not as a general promise about every contract or payment arrangement. CGST Rules, Rule 96A

Keep claim documents aligned

CBIC’s refund rules identify service invoice numbers and dates, along with relevant Bank Realization Certificates or Foreign Inward Remittance Certificates, as supporting information for export-of-services refund claims. Reconcile invoice details, return reporting and actual receipts so the records support the route and refund being claimed. CBIC refund rules

Report export invoices in GSTR-1

The GST Portal’s GSTR-1 guide says export invoice details may be filed without shipping bill number and date if those details are not yet available, then amended in the return period when received. Service exporters should verify the fields and current portal workflow that apply to their filings. GST Portal GSTR-1 user guide

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A practical decision checklist

  1. Test export eligibility. Confirm the statutory conditions, including place of supply, the parties’ establishment relationship and the manner of payment.
  2. Estimate the cash-flow difference. Compare the IGST you would fund under the payment route with the eligible ITC relevant to an LUT-route refund.
  3. Check readiness for each claim. Identify whether you can meet the RFD-11 requirement and maintain the invoice and remittance evidence applicable to the chosen route.
  4. Assess payment timing. For LUT exports, track the Rule 96A receipt period and seek any required extension rather than assuming it is automatic.
  5. Verify current procedure. Check the current statute, rules, notifications and GST Portal instructions before filing, particularly if the transaction involves intermediary services, related establishments or unusual payment arrangements.

If export status or the refund treatment is uncertain, obtain advice from a qualified Indian GST professional familiar with the specific transaction. A filing choice cannot repair a transaction that does not meet the export conditions.

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