Overview
An LOU also known as a Letter of Undertaking is a bank guarantee (wherein one bank gives the guarantee to the other) on behalf of a customer for loan repayment. LOU is generally used when an individual imports a product/ service from another individual from a different country.
It signifies banks located in different countries are involved in this International transaction and are Indian banks.
Some Full forms used
IGST= Integrated Goods and Service Tax
CGST=Central Goods and Services Tax
LOU Under GST
The Letter Of Undertaking (LOU) is a declaration document that an individual uses for the fulfillment of GST requirements. LOU is also termed LUT.
As per Central Goods and Service Act, 2017, “If any individual (i.e an exporter) is planning to export services or goods then it is compulsory to enclose the LUT contingent once the export is undertaken without IGST payment, which is tax-free.
Any taxpayer who is registered and involved in the exports of services or goods must include LUT with the GST RFD-11 application form in order to generate exports without IGST payment.
Benefits of using an LOU in GST
One can use LOU in the following areas:-
SEZ, i.e. Special Economic Zone to Zero-Rated Supplies
Any individual who exports services or goods to SEZ is eligible to get zero-rated supplies under GST.
Upon the submission of LOU with the supplier, the exporter will be eligible to export the services/goods without paying the IGST.
The tax will be refunded for Zero-Rated Supplies.
The GST charged for the raw material supplied to SEZ for making Services or Goods is entitled to a refund claim.
For instance, you are a leading shoe manufacturer in India and are exporting your shoes to China. Since the sole of the shoes (that you manufactured) is purchased by paying the tax, you can claim the tax refund as you are exporting to the SEZ zone.
Methods to claim a tax refund
You can enclose LOU while supplying and claiming a tax refund.
You can pay IGST before you opt for your supplies and raise a claim for a tax refund once supplied.
Validity:
The LOU is valid for one financial year, i.e one year. Hence, it will curb the stress of the dealer as they do not have to apply each time for exporting any consignment.
Saving on Working Capital:
The exporters who include a Letter Of Undertaking while supplying services or goods are exempted from paying tax. Paying tax and waiting for the refund is a time-consuming process and will seal the capital for a definite time. So, an exporter who applies for LOU can utilize this capital for their other business requirements.
Criteria to avail LOU
An individual should export from the below-mentioned areas:-
Outside or within India
Locations that fall under SEZ
An individual should be a registered taxpayer and the services or goods that he is exporting must be GST registered.
An individual who has been penalized under or IGST Act and CGST Act 2017 for evasion of tax (2.5 crores or above) will not be eligible for LUT (enclose).
An individual who is GST registered should provide LUT under his/ her letterhead.
LUT is stated in the Annexure of the GST RFD-11 form. It can only be issued by a Company secretary, Managing Director, or Authorized Person of the company.
The supplying facility without IGST payment will be revoked if any individual has failed to pay the tax within the stipulated time.
Since LUT is only valid for a year, a fresh LUT should be generated every financial year.
Procedure to file LUT
Get Legal Assistance from PayNuke for filing LUT easily. You can file for LUT through offline and online modes:-
Visit the official sites of GST, Goods and Service Tax.
Tap “Services” and then hit “User Services” under the tab of Services.
Choose “Furnish Letter Of Undertaking (LUT)” from the user services list.
Hit on the box that mentions “LUT applied for financial year” once the new page opens. To file the LUT, you need to choose the financial year.
If you have applied for LUT in offline mode in any case then you need to apply for it. For this, hit “Choose file”.
Browse through the information. You need to click the 3 boxes to mark the instructions. By clicking, you (i.e exporter) agree that you abide by the below-mentioned provisions:-
The goods must be exported within 3 months from the receipt date of the Export Invoice. A commissioner can extend this time for genuine reasons. The exporter must ensure to abide by the law of GST about exports.
Upon failing the export within the time prescribed, then you have to pay IGST Tax along with 18% interest from the Export Invoice date. This should be taken care of until the IGST payment is made. You also need to mention the information of your witnesses.
For this, you need to:-
Submit the Name, Address Proof, and Occupation of independent witnesses. Mention at least the name of two witnesses in the box.
You need to mention the location to file your LUT. Mention this in the box “Place of filing LUT”.
Tap “Save” and check your document before submitting it. For this click the button “Preview”.
Authorized Signatory
The following individuals can sign LUT:-
Any authorized signatory or exporter. The person who is authorized can be the Secretary of the company, MD, Partner, or any other authorized individual who is authorized to act as a stand-in for the people mentioned.
An authorized signatory can sign the application using Digital Signature Certificate (DSC).
Methods to submit an application
An individual can sign and file an application with:-
EVC
On your registered mobile number, you will receive an OTP if you filed your application using this method. A notification for the same will be received through email.
Enter the OTP that you received and hit the button “Proceed”. Ensure to note down the ARN, Application Reference Number.
DSC
Tap “Proceed” if you filed your application using this method. The system will generate ARN, an Application Reference Number.
On submitting the application successfully, you will get an acknowledgment copy for LUT generated. Hit “Download” to download the same.
How Does LOU Work?
Let’s take an example to understand this:-
An individual “X” resides in Chennai and is doing import business with a person who is living in Singapore. Let’s take this person as “Y”.
Suppose “X” wishes to import the raw material worth an amount of Rs. 5 lakhs from the person residing in Singapore, i.e “Y”.
Let’s assume that “X” does not have a bank account in Singapore. In order to get raw material, “X” has to make a payment to “Y”.
To do so, he/ she needs to get in touch with the bank that is maintaining his/ her account domestically.
For instance, if he/ she is maintaining his/ her bank account (SBI bank) in Chennai, he/ she has to request his/ her bank to issue a Letter Of Undertaking in favor of a bank that is located in Singapore. Let’s suppose this bank is ICICI bank.
The ICICI bank will transfer this amount to the Nostro account. The Nostro account will be maintained by SBI in this case with ICICI.
“X” will get a credit of Rs 5 lakhs for making the payment to “Y” for raw materials.
As soon as “X” gets the goods, he/ she has to make the payment of Rs. 5 lakhs to SBI. This bank will then do the transaction to ICICI bank.
Let’s understand this more simply, an amount of Rs. 5 lakhs was given as a loan to “X” by the ICICI. The SBI bank will check the economic history of “X” before generating LOU.
The domestic bank can claim any assets as security for repayment.
Once the bank is okay with the economic capability of the customer, it will offer the LOU assurance.
LUT can be done under below Categories:
GST – Letter of Undertaking (LUT) – 1,500/-