Do you know about the LUT v/s IGST Refund: Which is Better?

Introduction

The Goods and Services Tax (GST) is a comprehensive, multi-stage tax that is levied on every value addition. GST has replaced many indirect taxes in India and has simplified the tax structure. One of the benefits of GST is that it has made exports more competitive by providing a refund of the GST paid on exports. Businesses can claim a refund of the GST paid on exports through two methods: LUT and IGST refund. In this article, we will explore the differences between LUT and IGST refund and which one is better for businesses.

Understanding the Letter of Undertaking (LUT)

A Letter of Undertaking (LUT) is a declaration that the exporter files to claim exemption from payment of GST on exports. LUT is a document that is filed with the GST department and is valid for a period of one year. The exporter can export goods or services without paying GST by furnishing an LUT to the GST department. However, the exporter must fulfill certain conditions to be eligible for LUT. For example, the exporter must have a good track record of compliance with the GST laws, and the value of exports must be at least Rs. 1 crore.

Advantages of Letter of Undertaking (LUT)

The advantages of Letter of Undertaking (LUT) are listed below-:

1. Ease of Export: This is one of the best advantages of Letter of Undertaking (LUT) as it simplifies the export process for businesses. It allows exporters to supply goods or services without payment of integrated Goods and Services Tax (IGST) at the time of export, easing cash flow requirements.

2. Avoidance of Payment: With an LUT, exporters are not required to pay IGST while exporting goods or services. This eliminates the need for immediate payment and subsequent refund claims, reducing administrative burdens and delays.

3. Cost Savings: By avoiding the payment of IGST, businesses can reduce their working capital requirements and improve cash flow. This enables them to allocate resources more efficiently and invest in other areas of the business.

4. Streamlined Operations: LUT facilitates smoother operations for exporters as they can focus on their core activities without worrying about upfront tax payments or subsequent refund claims. This allows businesses to be more agile and responsive in the global market.

5. Competitive Advantage: LUT provides a competitive advantage to exporters by reducing the transactional costs associated with exporting. It enables businesses to offer more competitive prices to international customers, making them more attractive in the global market.

Drawbacks of Letter of Undertaking (LUT)

The drawbacks of Letter of Undertaking (LUT) are listed below-:

1. Eligibility and Compliance: Obtaining an LUT requires specific eligibility criteria and complying with relevant regulations. Failure to meet these requirements can result in the rejection of the LUT application or additional penalties.

2. Risk of Misuse: LUT misuse poses a significant risk to the government’s revenue collection. If businesses exploit LUT provisions for unauthorized activities or non-compliant transactions, it can lead to revenue loss and potential legal consequences.

3. Stringent Documentation Requirements: Applying for an LUT involves providing comprehensive documentation, including financial statements, bank guarantees, and compliance records. Meeting these documentation requirements can be time-consuming and may require additional resources.

4. Monitoring and Audit: Businesses utilizing LUT may be subject to monitoring and audit by tax authorities to ensure compliance. This can result in increased scrutiny, administrative burdens, and potential disruptions to business operations.

5. Limited Applicability: LUT is applicable only to eligible exporters who meet specific criteria and engage in eligible export activities. Businesses involved in other types of transactions or services may not benefit from LUT provisions and may need to follow alternative procedures for tax compliance.

Understanding IGST Refund

Integrated Goods and Services Tax (IGST) refund is a refund of the GST paid on exports. When an exporter exports goods or services, they pay IGST on the value of the exports. The exporter can claim a refund of the IGST paid on exports by filing a refund application with the GST department. The exporter can claim the refund of IGST paid on exports either through the online portal or through the GST facilitation center. The refund is processed within a period of 60 days from the date of filing the refund application.

Advantages of IGST Refund

The advantages of IGST Refund are listed below-:

1. Facilitates Exporters: This is one of the best advantages of IGST (Integrated Goods and Services Tax) refund as it plays a crucial role in facilitating exporters by providing them with a procedure to claim a refund of the tax paid on goods or services exported. This helps reduce the burden of taxes on exports and promotes international trade.

2. Boosts Competitiveness: IGST refund enhances the competitiveness of Indian exporters in the global market. By enabling exporters to claim a refund of the tax paid on exported goods or services, it makes Indian products more cost-effective and attractive to international buyers.

3. Working Capital Relief: Exporters often face cash flow challenges due to the blockage of funds in the form of taxes paid on inputs or services. IGST refund provides much-needed relief by allowing exporters to recover these funds, thereby improving their working capital position and enabling them to invest in other business activities.

4. Streamlines Export Processes: The availability of an IGST refund system streamlines the export processes and reduces administrative complexities for exporters. It provides a clear and defined process for claiming refunds, ensuring transparency and ease of doing business.

5. Promotes Ease of Compliance: The IGST refund system encourages exporters to comply with tax regulations and documentation requirements. Exporters need to maintain proper records and adhere to the prescribed procedures to claim the refund, promoting a culture of compliance within the export community.

Drawbacks of IGST Refund

The drawbacks of IGST Refund are listed below-:

1. Processing Delays: One of the major challenges with IGST refund is the issue of processing delays. Exporters often experience delays in receiving their refund amount, which can result in liquidity issues and hinder their business operations. Timely processing of refund claims is essential to avoid such drawbacks.

2. Documentation Requirements: Claiming an IGST refund involves fulfilling specific documentation requirements, which can be time-consuming and complex. Exporters need to provide accurate and comprehensive documentation, and any discrepancies or errors can lead to delays or rejection of the refund claim.

3. Refund Audits and Scrutiny: The refund claims made by exporters are subject to audits and scrutiny by the tax authorities to ensure compliance and prevent any fraudulent practices. While this is essential to maintain the integrity of the system, it can sometimes lead to additional scrutiny and delays in receiving the refund.

4. Blockage of Working Capital: Despite the availability of an IGST refund process, exporters still face the challenge of blocked working capital due to the initial payment of taxes on inputs or services. The refund process may not provide immediate relief, leading to continued financial strain for exporters.

5. Compliance Challenges: Exporters need to navigate various compliance requirements to claim IGST refunds, such as matching invoices, reconciling data, and meeting specific criteria. Meeting these compliance obligations can be challenging, especially for small and medium-sized exporters with limited resources and expertise.

Making the Right Choice:

a. Evaluating business requirements: Consider the nature of your business, export volumes, and financial capacity to determine which option suits you best.

b. Compliance considerations: Assess your ability to meet the eligibility criteria and fulfill the regulatory requirements associated with each method.

c. Cash flow management: Analyze your cash flow needs and determine whether the upfront payment of IGST will strain your finances or if LUT’s exemption benefits outweigh the administrative burden.

d. Long-term perspective: Consider the validity period of LUT and the potential growth of your export business to ensure a sustainable choice.

Conclusion

In the international trade system, understanding the options available for claiming IGST refunds is crucial for exporters. Both the Letter of Undertaking (LUT) and IGST Refund offer distinct advantages and disadvantages. While LUT provides upfront exemption from IGST payment, it comes with validity restrictions and compliance requirements. On the other hand, IGST Refund offers flexibility but requires exporters to pay the tax upfront, potentially impacting cash flow.