What is an LUT Bond?

An LUT Bond (Letter of Undertaking Bond) is a guarantee issued by an exporter to the government, promising to comply with export rules and regulations while exporting goods or services without paying Integrated GST (IGST) upfront. It is a critical instrument under the GST framework that allows exporters to maintain liquidity and defer their IGST obligations.

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Purpose of an LUT Bond

The primary purpose of an LUT Bond is to provide exporters with a financial mechanism to:

• Export goods or services without the immediate burden of paying IGST upfront.
• Ensure liquidity, as exporters often have significant costs related to production, logistics, and transportation before receiving payment for exports.
• Simplify compliance for exporters under GST.

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How Does an LUT Bond Work?

1. Application to Bank or GST Portal:
   The exporter submits an application for the LUT bond through the GST portal or approaches a bank, if needed.
2. Assessment:
   The authorities or the bank assess the exporter’s eligibility based on turnover, compliance history, and other factors.
3. Export Process:
   Once approved, the exporter ships goods or services without paying IGST upfront.
4. IGST Declaration and Payment:
   The exporter declares the IGST liability in their GST return and settles it if applicable.
5. Bond Compliance:
   The LUT bond remains valid for one financial year and can be renewed.

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Eligibility for LUT Bond

Exporters must fulfill the following criteria to apply for an LUT Bond:

• Exporter Status: Must be an exporter of goods or services.
• GST Registration: Should be registered under the GST Act.
• Previous Compliance: Exporters should not have been prosecuted for tax evasion above Rs. 250 lakh in the past five years.
• Nature of Exports: Exports must not be subjected to anti-profiteering measures.

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Benefits of LUT Bond

1. Liquidity Access:
   Exporters can avoid the immediate financial burden of IGST, freeing up working capital.
2. Reduced Compliance Burden:
   Exporters are exempt from filing bonds with security in certain cases, and the process is simplified for regular exporters.
3. Deferred Tax Burden:
   IGST liability is deferred until the final declaration and settlement.
4. Cost Efficiency:
   Avoiding upfront IGST payment reduces the need for short-term borrowing or credit.

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Limitations of LUT Bond

1. Turnover Limit:
   Earlier, the annual turnover limit for LUT eligibility was Rs. 1.5 crore, but this limit has now been removed for most exporters under GST. However, exporters must still comply with GST eligibility norms.
2. Security Requirements:
   Some banks or authorities may require security deposits or collateral, particularly for exporters with limited credit history.
3. Risk of Fraud:
   As IGST payment is deferred, there is a reliance on the exporter to comply and pay, posing a potential fraud risk for authorities.
4. Time-bound Validity:
   The LUT Bond is valid for one financial year and must be renewed annually.

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Key Takeaways

• Mandatory Filing: Exporters who wish to export without IGST must file an LUT bond or a bond with security.
• Process: The LUT can be filed electronically via the GST portal, making it user-friendly.
• Enhanced Compliance: Proper maintenance of records and timely GST filings are crucial to avoid penalties.

Exporters are advised to consult tax professionals or legal advisors for guidance on LUT bond applicability, filing, and compliance.