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
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):
Tax Refund For Zero-Rated Supplies:
Saves The Working Capital:
Get Our Legal Assistance To File LUT In An Easy Manner
The LUT can be filed through both online and offline mode.
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 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.
Documents Required For LUT Submitted Via Offline:
We execute legal work for over 1000 companies and LLPs every month, by leveraging our tech capabilities, and the expertise of our team of legal professionals come on board and experience the ease and convenience!
By handling all the paperwork, we ensure a seamless interactive process with the government. We provide clarity on the incorporation process to set realistic expectations.
With a team of over 300 experienced business advisors and legal professionals, you are just a phone call away from the best in legal services.