In the ever-evolving world of global trade and commerce, understanding the importance of a letter of undertaking becomes crucial. Especially when it is within the vast and economically diverse landscape of India.
In this blog post, we embark on a journey to simplify the concept of the LUT, making it easy for you to navigate this essential aspect of Indian trade. As we unravel the layers of this document, you’ll discover its significance, benefits, all while ensuring businesses stay tax-compliant and competitive on the global stage.
What is a letter of undertaking?
A letter of undertaking is an important document in international trade, especially in a diverse and vast country like India. It’s like a promise from a business or exporter to the government. This promise says they’ll follow the rules and pay their taxes for the things they sell abroad.
The main job of an LUT is to help businesses and exporters avoid paying certain taxes upfront. This helps them save money and time.
What is the significance of a letter of undertaking in india?
In India, the significance of a letter of undertaking lies in its role under the Central Goods and Service Tax Act of 2017. Exporters can claim a refund on these taxes by applying for an LUT or securing an export bond with the GST department.
The heart of this mechanism is that exporters, through the submission of a LUT, formally declare their commitment to fulfilling all GST-related requirements without having to make an immediate IGST payment at the time of export. Once the GST department accepts this LUT, it effectively exempts the exporter from the obligation of paying taxes on their exports. This not only eases the financial burden but also prevents the tying up of funds through upfront tax payments, making international trade more seamless and economically efficient.
What are the prerequisites to get a letter of undertaking in india?
Eligibility for Export Location: The exporter’s operations can be either within India, outside India, or within the Special Economic Zones (SEZs).
Requirement for GST Registration: The exporter must possess valid taxpayer registration, and the goods or services they export should also be registered under the GST.
Compliance with Tax Obligations: Exporters who have faced legal action under the CGST Act, 2017, or IGST Act, 2017, for not giving tax,the amount exceeding Rs. 2.5 crores, are not eligible to apply for an LUT.
Official Letterhead Criteria: The LUT must be submitted on the exporter’s authorized letterhead, which should be registered under the GST.
Authorized Signatory Condition: In the case of a company, the LUT must bear a digital signature from the partner, company secretary, managing director, or any duly empowered individual.
Punctual Tax Payment Obligation: Failure to meet the tax payment deadlines stipulated in the LUT could lead to the withdrawal of the privilege to export without paying IGST.
Validity Period: A LUT remains valid for one financial year, necessitating the issuance of a fresh LUT for each fiscal year.
What are the benefits of a letter of undertaking ?
Tax Savings:
One of the primary advantages of an LUT is that it allows exporters to save money. By not having to pay Integrated Goods and Services Tax upfront on their exports, businesses can preserve capital and allocate it to other operational needs.
Streamlined Export Process:
With an LUT in place, the export process becomes more efficient. Exporters can ship their goods or services without dealing with complicated tax procedures, reducing administrative burdens.
Faster Customs Clearance:
Customs authorities tend to expedite the clearance process for shipments with an LUT.
Improved Cash Flow:
Exporters benefit from improved cash flow management. Funds that would have been locked up in upfront tax payments are available for other business activities, such as investment and expansion.
Competitive Edge:
By eliminating the need to pay IGST at the time of export, businesses can offer more competitive prices for their products or services in the international market. This can boost their competitiveness and market share.
Encouragement of Exports:
The availability of LUTs encourages businesses to engage in international trade and expand their export activities, contributing to economic growth and promoting the “Make in India” initiative.
One-Year Validity:
An LUT is typically valid for one financial year, reducing the administrative hassle of frequent renewals. This long validity period simplifies compliance and documentation for exporters.
Risk Mitigation:
Exporters can mitigate the risk associated with fluctuating exchange rates and unforeseen financial challenges, as they do not need to maintain significant sums for tax payments.
What are the processes for applying for the letter of undertaking?
GST Portal Login:
Log in to the GST portal (www.gst.gov.in) using your credentials.
Access User Services:
Go to the Services tab and select the “User Services” option.
Select LUT Application:
Click on the “Furnish Letter of Undertaking (LUT)” link.
Form Filling:
Fill in the required details in the LUT form, including the financial year, bond details, and export specifics.
Document Upload:
Upload the supporting documents, which may include bank details, export invoices, and any other specified documents.
Review and Verify:
Carefully review the entered information and the attached documents to ensure accuracy.
Digital Signature or Verification:
Sign the declaration using the Digital Signature Certificate or the Electronic Verification Code.
Submission:
Submit the LUT application.
Acknowledgement Reference Number:
Upon successful submission, an acknowledgement reference number will be generated.
Verification by GST Authorities:
The GST authorities will assess the application and review the supporting documents.
Approval Confirmation:
Once the application and documents are verified, the LUT will be considered accepted, and you will receive an approval confirmation.
Record Keeping:
Maintain a copy of the approved LUT for your records and future reference.
What is the eligibility for getting the benefits of LUT?
Exporter must be registered:
The exporter must be a registered entity under the GST law.
Export Goods Exclusivity:
The LUT benefits apply solely to the export of goods and do not extend to the export of services.
Clean Legal Record:
The exporter should not be involved in any pending legal proceedings, such as prosecution, under the GST law or any other applicable laws.
Financial Soundness:
The exporter must not have any outstanding tax payments, unpaid interest, penalties, or any other dues under the GST law.
Summary – As India’s businesses continue to flourish and engage in international trade, the letter of undertaking remains a vital companion, unlocking opportunities for growth and strengthening the country’s presence in the global arena.
With an LUT in hand, Indian businesses can expand their reach, diversify their customer base, and thrive on a global stage. Amazon Global Selling provides a trusted platform for reaching customers worldwide, and when combined with the benefits of an LUT, it’s a winning formula for success in the international marketplace.
Dariel Campbell is currently an English instructor at a university. She has experience in teaching and assessing English tests including TOEFL, IELTS, BULATS, FCE, CAE, and PTEG. With over a decade of teaching expertise, Dariel Campbell utilizes his knowledge to develop English lessons for her audience on English Overview.
