What is a letter of undertaking?
A Letter of Undertaking (LOU) is a bank guarantee given by one bank to another bank on behalf of the customer for repayment of the loan. Mostly, the LOU is used when the person imports anything from a person, in another country. It shows that the international transactions made between banks, situated in different countries and that both banks involved should be Indian banks.
Letter of Undertaking under GST
- The Letter of Undertaking (LOU) is the document that the user will use to make a declaration for the fulfillment of all the requirements of GST.
- The letter of undertaking is also called LUT.
- According to the Central Goods and Service Act, 2017, if the exporter wants to export goods or services, then it is mandatory to enclose the LUT in case of export undertaken without paying the Integrated Goods and Service Tax (IGST), which is tax-free.
- Every registered tax-payer involved in exporting goods or services should enclose the LUT with the GST RFD-11 form, to generate exports without payment of IGST.
Benefits of using a letter of undertaking
A lot of benefits can be availed by using the LOU in exporting goods and services across the world. The LOU can be used in the following areas;
Zero rated supplies to Special Economic Zone (SEZs):
- The person who exports the goods or services to the Special Economic Zones (SEZ) is eligible to avail zero-rated supplies under GST.
- By submitting the LOU along with the supplies, the exporter is eligible to export the goods or services without paying the IGST.
Tax refund for zero-rated supplies:
- The GST charged on raw materials for making goods or services, which is supplied to the SEZ, is entitled to claim the refund.
- For example, if the exporter supplies shoes to china, then the sole of those shoes would be purchased by paying the tax. So the exporter is entitled to claim the tax refund as the exports were made to the SEZ zone.
- There are two methods of claiming the refund, they are
- The exporter can enclose a letter of undertaking while supplying and claiming the refund.
- The exporter can pay IGST before providing supplies, and claim the refund once supplied.
- Once the LOU is filed, it will be valid for one year, i.e one financial year. So it will reduce the burden of the dealer not to apply every time of the export consignment.
Saves the working capital:
- The exporters who enclose the LOU while supplying the goods or services are exempted from tax-paying. So the initial payment of tax and refunding later will be a time-consuming process, that involves the capital being locked for a certain time.
- By applying the LOU, the capital would be utilized for other requirements.
Checklist Criteria for obtaining the letter of Undertaking
- There are a few eligibility criteria for obtaining the LOU;
- The person should export from the following areas
- Within or outside of India.
- Places that fall under the Special Economic Zones (SEZs).
- TThe person must be a registered tax-payer, and the goods or services involved in exporting should also be registered under GST.
- The person who has been prosecuted under the Central Goods and Services Tax (CGST) Act, 2017 or Integrated Goods and Services Tax Act (IGST) 2017 for tax evasion of Rs 2.5 crore or above is not eligible to enclose the LUT.
- The LUT should be provided under the letterhead of the person, who is registered under the GST.
- The LUT is mentioned in the annexure of form GST RFD-11, can be issued by the managing director, a partner, company secretary, or any person duly signed by the company.
- If any person has failed to pay the tax within the time mentioned in the LUT, then the facility of supplying without payment of IGST will be revoked.
- As the LUT is valid for one financial year, a fresh LUT should be generated for every financial year.
Procedure for filing the Letter of Undertaking ( LUT)
Get our legal assistance to file LUT in an easy manner
The LUT can be filed through both online and offline mode.
- Visit the official website for Goods and Service Tax (GST).
- On top of the page, click on the services tab.
- Under the services tab, click on ‘user services’.
- From the list of user services, select “Furnish letter of undertaking (LUT)”.
- Once the page opens, click on the “LUT applied for financial year” box, select the financial year for which you want to file the LUT.
- In case, if your previous period LUT is applied on offline mode, then you are required to annex it by clicking the button “choose file”.
- Next, go through the details that appear on the screen. Here you need to mark the instructions by clicking on the three boxes. By doing so, the exporter abides by the following provisions;
- The export of goods must be done within 3 months from the date of receipt of the export invoice. This time can be extended by the commissioner if he finds any proper reason.
- The exporter must abide by the GST law about exports.
- If failed to export within the prescribed time, then the IGST Tax should be paid along with the 18% interest from the date of export invoice until the payment of IGST is made.
- Now it is important to mention the witness’s information. Submit the name, occupation, and address proof of a minimum of 2 independent witnesses in the box
- Enter the place, from where you are filing your LUT, under the “place of filing LUT” box.
- Click on “save” and after saving the document, you can preview the document before submission by clicking on the “preview” button.
- Now the LUT should be signed by the following persons
- The exporter or any authorized signatory.
- Here the authorized signatory can be partners, MD, or Company Secretary, or any other person authorized to act on behalf of these peoples.
- The application can be signed with the Digital Signature Certificate (DSC) of the authorized signatory. The application can be submitted by two methods, they are
- Sign and file with DSC
- Sign and file with EVC
If the application is filed using the DSC method, click the “proceed” button. Now the system generates an Application Reference Number (ARN).
If the application is filed using the EVC, then you will receive the OTP in your registered mobile number and email notification for the same. Enter the OTP and click the proceed button, note the Application Reference Number (ARN).
- Once the application has been successfully submitted, the acknowledgment copy of LUT will be generated. Then download the same by clicking the “download” button.
How does a letter of undertaking work?
It can be explained better using an example, let’s take a person X residing in Chennai doing an import business with a person Y living in Singapore. Now X wants to import raw materials worth Rs 5 lakhs from Y. The X has to make payment to Y, to obtain the raw materials. As X doesn’t have any bank account in Singapore, he/she will have to approach the bank maintaining the account ( Eg. SBI bank) in Chennai and ask for LOU to be issued in favor of a bank in Singapore (Eg. ICICI bank branch in Singapore).
Now, SBI bank conveys the LOU information to the ICICI bank in Singapore. The ICICI bank will now transfer Rs 5 lakh to a Nostro account (It is an account maintained by the domestic bank i.e SBI with the foreign bank i.e ICICI). X will then avail the credit of Rs 5 lakhs to pay Y, and receive the raw materials.
Once X receives the goods, he/she should pay Rs 5 lakhs to SBI, which will pay the same to ICICI bank. It can be said that a Rs 5 lakhs loan was given to X by the ICICI bank in Singapore and assured by the SBI bank in Chennai if X defaults. Here the domestic bank, before providing the LOU, will check and scrutinize the economic history of the account holder. Even the bank can claim any assets to be submitted as security for repayment.
Once the bank is satisfied with the customer’s economic capability, it gives the LOU assurance.
Documents required for letter of undertaking
Documents required for LUT submitted via online:
There are no requirements for any documents to be uploaded with an online application. But as a precaution, the following documents must be available.
- The previous year accepted acknowledgment LUT.
- Witness details along with their ID and address proof.
- The proof of consent of the witness for such LUT.
Documents required for LUT submitted via offline:
- A cover letter addressing the assistant or deputy commissioner of GST, who has the jurisdiction for your place of business.
- GST registration certificate copy
- Two original sets of GST RFD-11 Form.
- Two original sets of the annexure of LUT on the Letterhead of an entity. Such annexure should be notarized.
- Signature from all undertakers
- Two witnesses.
- Affix the personal ID and PAN of all undertakers
- Affix the personal ID and address proof of both witnesses.
- Affix the documents about the company incorporation. In the case of a partnership firm, a partnership deed must be attached.
- PAN Card of the company.
- A copy of the board resolution or authorization letter for authorizing the director or partner to file the LUT.
- Self-declaration of the entity, which is not prosecuted for an offense like tax evasion, etc under the CGST, 2017.
- Consolidate the summary of the invoice for export sales and get certification from the CA. But after the 2017 amendment, the turn over requirements are waived off.
- Copy of Import Export Code (IEC), if present.
After the successful submission of the application, the ARN, and acknowledgment of the LUT will be generated. Similarly, successful filing will be intimated through SMS and registered email ID.
- If a LUT application is not processed by tax authorities within three working days, then the application will be considered as approved and the status of the LUT application will be deemed as ‘approved’.
- When an application is deemed approved after three working days, then an order copy is generated through the GST portal, and the order can be downloaded by the taxpayer. An alert will be sent to tax authorities upon deemed approval, along with intimation to the taxpayer.
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