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For an eligible export of services from India, neither route is universally better. Exporting under a Letter of Undertaking (LUT) avoids paying integrated GST (IGST) upfront, but your refund is limited by the eligible unutilized input tax credit (ITC) formula. Paying IGST requires cash first and then a refund claim for that IGST. Choose after checking export eligibility, your ITC balance, cash flow, documentation and the transaction-specific rules that apply.
This guide explains the two options, the filing sequence, the service-export refund calculation and the practical tests behind the decision. It does not promise that one route produces a faster refund; current official material does not establish a comparable processing-time advantage.
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The two export routes at a glance
India’s GST framework treats a qualifying export of services as a zero-rated supply. Section 16(1) of the Integrated Goods and Services Tax Act (IGST Act), as reproduced by the Central Board of Indirect Taxes and Customs (CBIC), states: “’zero rated supply’ means any of the following supplies of goods or services or both, namely:–– export of goods or services or both; or supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.”
Zero rating gives an eligible exporter two alternatives under section 16(3): supply without payment of IGST against a bond or LUT, or supply on payment of IGST and claim a refund of the tax paid. The alternatives are not two different definitions of export; they are two ways of applying zero-rating after the supply qualifies.
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| Route | Tax at the time of export invoice | Refund sought | What drives the practical choice |
|---|---|---|---|
| LUT or bond | No IGST is paid on the qualifying export while the LUT or bond is valid. | Eligible unutilized ITC, subject to the refund rules and the maximum-refund formula. | Preserves cash because tax is not paid upfront; requires a valid undertaking, accurate returns and support for the ITC refund. |
| Pay IGST | IGST is paid on the export supply. | The IGST paid on the qualifying export. | Requires funding the tax until the refund is sanctioned; the refund claim is tied to the IGST reported and paid on those exports. |
The table describes statutory mechanics, not an individualized tax recommendation. A business with little eligible ITC may find the LUT refund small, while a business with sufficient ITC but limited cash may prefer not to fund IGST. The reverse can be true where the exporter wants the tax-paid refund route and can carry the interim cash requirement.
First prove that the supply is an export of services
The LUT-versus-IGST decision starts only after the supply meets every element of the export-of-services definition in section 2(6) of the IGST Act. Test the actual contract, recipient, service delivery and payment evidence against all five conditions:
- Supplier in India: the supplier must be located in India.
- Recipient outside India: the customer receiving the service must be located outside India.
- Place of supply outside India: the applicable place-of-supply rule must put the supply outside India. The answer depends on the service and its facts, not merely on the customer’s billing address.
- Permitted receipt of consideration: payment must be received in convertible foreign exchange, or in Indian rupees where the Reserve Bank of India permits that mode for the transaction.
- Not merely distinct establishments: supplier and recipient must not be establishments of the same person that fall within the statutory explanation to section 2(6).
Failure of any one condition can remove export treatment. An invoice describing an overseas customer is not enough if, for example, the place-of-supply rule points to India or the payment arrangement does not satisfy the statutory receipt requirement.
Check the contract and service location
Identify who is legally contracting, who receives the service, where relevant performance occurs and which place-of-supply provision applies. Keep the agreement, statement of work, correspondence and evidence of delivery consistent with the invoice. A foreign parent, branch or group company may require a distinct-establishment analysis rather than an assumption that every cross-border invoice is an export.
Check how consideration is received
Match bank credits and remittance documents to invoices. The CBIC sectoral FAQ discusses an NRE-account payment example; that fact-specific explanation should not be generalized into a rule for every overseas customer or every rupee receipt. If payment is in Indian rupees, confirm that the Reserve Bank of India permits the arrangement for the relevant transaction and retain the supporting banking evidence.
Separate eligibility from refund route
An exporter can choose an LUT or pay IGST only for a supply that is already a qualifying zero-rated export. Neither route cures an incorrect place-of-supply conclusion, an ineligible recipient relationship or a payment that fails section 2(6).
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How exporting under an LUT works
An LUT is the undertaking used to make qualifying zero-rated supplies without payment of IGST. CBIC identifies the bond-or-LUT requirement under section 16(3) of the IGST Act and Rule 96A of the CGST Rules. A bond may be required in circumstances where an LUT is not available or accepted; confirm the current rule position for the taxpayer before filing.
Furnish the LUT on the GST Portal
The GST Portal’s published instructions identify Form GST RFD-11 for furnishing an LUT. The navigation shown in those instructions is:
- Sign in to the GST Portal with the taxpayer’s credentials.
- Open Services > User Services > Furnish Letter of Undertaking (LUT).
- Select the relevant financial year.
- Complete the undertaking, provide the required declarations and authorised-signatory details, and submit it using the portal’s available verification method.
- Save the acknowledgement and LUT number with the export records.
Portal labels and validation screens can change. Use the current RFD-11 form and instructions displayed for the relevant year rather than relying on an old screenshot or an earlier filing sequence.
Issue and report the export invoices
Invoices should identify the export nature of the supply and carry the particulars required by GST rules. Report export invoice details in the applicable returns. GST Portal guidance for GSTR-1 describes exports as zero-rated inter-State supplies and provides fields for export invoices. Reconcile the invoice number, date, recipient details, value, currency and shipping or remittance evidence across the invoice, return and accounting records.
Apply for the unutilized-ITC refund
For exports made without payment of tax, the refund application is filed electronically in Form GST RFD-01 under the refund rules. The claim is not an automatic withdrawal of every balance in the electronic credit ledger. It is capped by the prescribed formula and supported by the eligible ITC and export evidence.
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Under the tax-paid route, charge and pay IGST on the qualifying export supply, report the export invoice in the relevant return and then apply for a refund of the IGST paid. The refund sought is the IGST attributable to those reported and paid export supplies, not an unrelated credit balance.
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Fund the tax before claiming it back
Payment timing is the central cash-flow issue. The exporter must have funds to discharge the IGST liability before seeking the refund. Model the amount and the period for which cash will be unavailable, including the possibility that the department requests clarification or supporting documents.
Keep the tax-paid trail intact
Reconcile the tax amount from the invoice to the return, payment challan or electronic liability ledger and the refund application. A mismatch in invoice values, export reporting or tax payment can delay clarification or reduce the amount that can be substantiated. Follow the current refund form and documentary requirements for the period of claim.
How the LUT refund is calculated for service exports
The maximum refund for zero-rated supplies made without payment of tax is determined under the refund rules using the turnover of zero-rated supplies, Net ITC and Adjusted Total Turnover. In simplified form, the ceiling is expressed as:
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Use the definitions and exclusions in the rules when calculating each term. The formula is a ceiling; it does not mean that every amount in the credit ledger is refundable.
Service-export turnover has payment and completion components
For service exports, the relevant turnover calculation uses amounts received during the period, the value of services completed for which payment was received earlier, and advances for services that were not completed during the period. Consequently, the claim is connected to both cash receipts and service-completion timing.
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A long-term project can therefore produce a different refund ceiling from a month of fully completed, paid invoices even when the contract value is the same. Maintain a schedule that ties each amount to the invoice, receipt date, completion status and the refund period. Do not treat the entire unbilled contract value or every future receivable as current-period zero-rated turnover.
Net ITC must be eligible ITC
Include only input tax credit permitted by GST law and reflected in the records required for the claim. Blocked credits, unsupported credits or credits outside the relevant period cannot be converted into a refund merely because the business has made exports. Reconcile purchase registers, tax invoices, credit-ledger balances and the return data used for RFD-01.
Which route should you choose?
Use a written decision test for each financial year and revisit it when the business model or payment pattern changes.
Choose LUT first when preserving cash is critical
- You have recurring export invoices and do not want to fund IGST on each invoice.
- You expect eligible ITC and can support the formula-based refund claim.
- You can furnish a valid LUT before making the relevant supplies and maintain the required records.
- Your accounting process can track foreign receipts, service completion and period-specific turnover.
This route avoids the initial IGST outflow, but the refund depends on eligible ITC and the statutory ceiling. If most costs carry no GST or the credit is blocked, the resulting refund may be limited.
Consider paying IGST when a tax-paid refund fits your facts
- You can finance the IGST until the refund is received.
- You prefer a refund claim based on the IGST paid on identified export invoices rather than an unutilized-ITC calculation.
- Your documentation and systems can reconcile payment, return reporting and the refund application.
- The taxpayer’s specific eligibility or transaction circumstances make the LUT route unavailable or impractical, subject to confirmation under current rules.
Paying IGST is not a guarantee of quicker processing. The official materials explain the legal route, but do not establish a current, comparable processing-time result for service exporters.
Use the ITC and cash-flow comparison together
| Question | If the answer is “yes” | What it suggests |
|---|---|---|
| Will substantial eligible ITC accumulate during the claim period? | The LUT formula may produce a meaningful refund, subject to turnover and Net ITC limits. | LUT becomes more attractive if cash preservation also matters. |
| Can the business comfortably fund IGST and tolerate the interim cash lock-up? | The tax-paid route is financially feasible. | Compare its documentation burden with the LUT formula rather than assuming speed. |
| Is the business unable to furnish or maintain a valid LUT? | The LUT route may not be available until the issue is resolved. | Check the current Rule 96A and portal requirements; do not export without confirming the applicable route. |
| Are receipts, completion dates or place-of-supply facts uncertain? | Either refund claim could be challenged. | Resolve eligibility and evidence first; route selection cannot fix a defective export. |
Step-by-step compliance workflow
- Map the transaction: identify supplier, recipient, service, contract entity, performance facts and the applicable place-of-supply rule.
- Verify section 2(6): document the location and relationship tests and confirm the permitted payment method.
- Forecast the numbers: estimate eligible Net ITC, export receipts, completed services and Adjusted Total Turnover for the intended refund period.
- Select the route: compare the expected LUT refund ceiling with the IGST amount to be funded and refunded.
- Complete the prerequisite: furnish the LUT in RFD-11 before relying on tax-free export invoices, or configure the invoice and return process to charge IGST.
- Issue consistent invoices: use the required export wording and retain contract and delivery evidence.
- Report in returns: enter export invoice details accurately in GSTR-1 and other applicable returns.
- Track receipts and completion: maintain invoice-level schedules for bank receipt, currency or permitted rupee receipt, service completion and advances.
- File the refund: use RFD-01 for an eligible unutilized-ITC claim under LUT, or the applicable process for refund of IGST paid.
- Reconcile after filing: match the claim to the ledger, returns, invoices and bank evidence; answer any portal or departmental clarification with the same records.
Records to keep ready
- Executed customer contract, purchase order and statement of work.
- Proof that the recipient is outside India and is not merely a distinct establishment of the supplier.
- Place-of-supply analysis for the service delivered.
- Export invoices, invoice register and GSTR-1 data.
- Bank statements, foreign-inward-remittance evidence and documentation supporting any permitted Indian-rupee receipt.
- LUT acknowledgement and number, or bond documentation where applicable.
- Purchase tax invoices, ITC reconciliation and electronic credit-ledger extracts.
- Schedules showing receipts, advances, completed services and the period used in the refund calculation.
- RFD-01 acknowledgement, statements, declarations and responses to notices or clarifications.
Common mistakes and how to correct them
Using LUT language without a valid LUT
An exporter may print “supply meant for export under LUT without payment of IGST” while the undertaking was not furnished for the relevant year. Check the RFD-11 acknowledgement before issuing the first tax-free export invoice and retain evidence of validity.
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Calling every overseas customer an export recipient
Customer location alone does not establish export status. Recheck place of supply and the distinct-establishment condition for group entities, branches and intermediaries.
Claiming all ledger credit under LUT
The refund is restricted by Net ITC and the turnover formula. Remove ineligible or unsupported credits, use the correct service-export turnover components and retain the calculation used in RFD-01.
Ignoring receipt and completion timing
For services, the refund-period turnover reflects payments received, previously paid completed services and relevant advances. A contract signed or an invoice raised without the required receipt or completion evidence may not belong in the period’s calculation.
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Assuming a route is faster
Neither route should be selected on an unsupported promise of quicker processing. Processing depends on the claim, records, portal validation and any departmental review; no current official comparison establishes a universal winner.
Relying on outdated portal screenshots
Portal menus and fields can change. Use the current GST Portal instructions for RFD-11, GSTR-1 and refund filing, and verify the financial year selected before submission.
When professional review is warranted
Obtain current GST advice before filing when the service has a special place-of-supply rule, the customer is a related or group entity, payment is routed through an unusual account, consideration is partly in rupees, the LUT or bond position is unclear, or a large ITC refund is at stake. A professional can review eligibility and the calculation; accounting or return software can organize invoices and filings but cannot determine the legal place of supply or cure an ineligible export.
CBIC’s IGST Act text, refund rules and GST Portal instructions should be checked against current consolidated amendments and the live portal before each filing. The legal alternatives remain clear, but the correct route depends on the facts and records of the particular exporter.
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