Exporters under GST often hear two phrases together: zero-rated supply and Letter of Undertaking (LUT). They are related, but they are not the same thing. Zero-rating is the tax treatment given to exports and specified SEZ supplies under section 16 of the Integrated Goods and Services Tax Act, 2017. An LUT is one route through which an eligible registered person can make a zero-rated supply without paying IGST upfront and then claim refund of eligible unutilised input tax credit.
The starting point is the current Integrated Goods and Services Tax Act, 2017 on India Code. Section 16 treats exports of goods or services and supplies to an SEZ developer or SEZ unit for authorised operations as zero-rated supplies. It also preserves input-tax-credit entitlement for zero-rated supplies, subject to the GST law's restrictions.
What does zero-rated supply mean?
A zero-rated supply is different from an ordinary exempt supply. Under section 16 of the IGST Act, exports and qualifying SEZ supplies receive zero-rated treatment. This matters because eligible input tax credit can be availed for making zero-rated supplies even though the outward supply itself may be made without payment of IGST under the permitted route.
For a business, the practical effect is that GST incurred on eligible domestic inputs and input services does not automatically become a cost merely because the output is exported. Subject to the statutory conditions and blocked-credit rules, accumulated eligible ITC may be refundable.
What is an LUT?
A Letter of Undertaking is a compliance mechanism used for making eligible zero-rated supplies without payment of IGST. Instead of paying IGST on the export and later seeking refund of that tax, the exporter follows the LUT or bond route and can claim refund of eligible accumulated ITC.
The LUT should therefore not be described as a GST exemption certificate. It is an undertaking connected with the without-payment-of-tax route for zero-rated supplies. The underlying transaction must still satisfy the legal requirements for export or the relevant SEZ supply.
LUT route versus payment-of-IGST route
The current section 16 framework makes refund of unutilised ITC on zero-rated supplies without payment of IGST under bond or LUT the general refund route, subject to conditions and safeguards. The law also permits the Government, on the GST Council's recommendation and subject to prescribed conditions, to notify classes of persons or supplies that may make zero-rated supplies on payment of IGST and claim refund of that tax.
Accordingly, a business should not assume that every exporter can freely choose the pay-IGST-and-refund route in every case. The current statutory framework and applicable notifications should be checked for the taxpayer and supply concerned.
What should an export invoice show?
CBIC's tax invoice rules require an export invoice to carry the appropriate export endorsement. Where the supply is made without payment of IGST under bond or LUT, the invoice should carry the prescribed endorsement indicating that it is a supply meant for export under bond or Letter of Undertaking without payment of IGST.
This is a useful accounting control: the invoice template, GST treatment and IRP or billing configuration should all follow the same route. A business should avoid a situation where the LUT route is intended but the invoice is configured as an export on payment of IGST.
How is accumulated ITC refunded under the LUT route?
The GST Portal's official refund guidance for exports without payment of tax states that the refund application is filed in Form GST RFD-01. The applicant provides the relevant zero-rated turnover and adjusted total turnover information, while the portal computes the eligible refund subject to the applicable rules and electronic-credit-ledger limits.
The portal guidance also requires the relevant returns to be filed for the tax periods connected with the refund claim. For export of goods, shipping bill and Export General Manifest details are relevant. For export of services, the portal guidance refers to FIRC or BRC evidence for receipt of foreign exchange.
Practical example: service exporter using LUT
Assume an Indian GST-registered consulting firm supplies qualifying export services to an overseas client. It has a valid LUT route available and invoices the client without charging IGST. During the same period, it incurs eligible GST on software subscriptions, professional services and other business inputs.
The firm does not simply expense all of that GST because its outward invoice has no IGST. It first tests whether the input tax is eligible under the normal ITC rules. Eligible accumulated ITC attributable to the zero-rated activity can then form part of a refund claim under the prescribed formula and RFD-01 process, subject to the applicable conditions and portal validations.
Practical example: exporter of goods
Consider a manufacturer exporting goods under LUT without payment of IGST. Its export invoices should carry the appropriate LUT or bond endorsement, and the shipping and GST-return data should be consistent. When claiming accumulated ITC refund, the GST Portal expects the export information in the refund statement to align with the invoice data reported in GSTR-1, and shipping bill and EGM information becomes relevant for goods exports.
Checklist before using the LUT route
- Confirm that the outward supply is genuinely zero-rated: establish that it is an export or a qualifying supply to an SEZ developer or unit for authorised operations.
- Check the current LUT or bond eligibility and procedure: do not rely on an old year's filing or an outdated internal SOP without confirming the live GST position.
- Configure invoices correctly: use the prescribed export endorsement for supplies made without payment of IGST.
- Reconcile GSTR-1 and books: export invoices in the refund claim should agree with the return data.
- Preserve export evidence: maintain shipping documentation for goods and appropriate foreign-remittance evidence for services, along with contracts and invoices.
- Review ITC eligibility before claiming refund: zero-rating does not convert blocked or otherwise ineligible input tax into refundable ITC.
- File RFD-01 carefully: the GST Portal warns that the refund application cannot simply be rectified after filing; validate the figures and statements before submission.
Common mistakes to avoid
- Treating zero-rated and exempt as identical: zero-rating has a specific statutory ITC and refund framework.
- Assuming LUT itself proves export status: the transaction must independently satisfy the legal conditions for export or qualifying SEZ supply.
- Using the wrong invoice endorsement: the invoice should reflect whether the export is under LUT or bond without IGST or under an applicable payment-of-IGST route.
- Claiming every GST input as refundable: normal ITC restrictions, including blocked credits, continue to matter.
- Ignoring return and shipping-data mismatches: GST Portal refund validations compare refund information with return data and, for goods, relevant export-system information.
Practical takeaway
Under GST, zero-rating is the legal treatment of exports and qualifying SEZ supplies; LUT is a mechanism for making eligible zero-rated supplies without paying IGST upfront. The finance workflow should connect the LUT position, invoice endorsement, GSTR-1 reporting, export evidence, ITC eligibility and RFD-01 refund claim. Treating these as one integrated process reduces the risk of refund delays and inconsistent GST reporting.
