GST on Service Exports: LUT vs. IGST Refund Route
Should you export services with a Letter of Undertaking (LUT) or pay IGST and claim a refund? Compare cash flows, timelines, and audit compliance.
Understanding Service Exports under GST
Under the Integrated Goods and Services Tax (IGST) Act, 2017, the export of services from India is classified as a Zero-Rated Supply. This means that the government allows exporters to supply services without paying GST, and to claim refunds on any Input Tax Credit (ITC) accumulated on business purchases (like servers, laptops, and internet bills).
However, simply billing a client located outside India does not automatically qualify as an export. To legally claim 0% GST, you must satisfy the strict definition of an export of service, and select one of two tax pathways: the LUT (Letter of Undertaking) Route or the IGST Refund Route.
The 5 Legal Conditions for Export of Services
According to Section 2(6) of the IGST Act, a transaction qualifies as an export of service only if all five of the following conditions are met:
- Supplier Location: The supplier of service must be located in India.
- Recipient Location: The recipient of service must be located outside India.
- Place of Supply (PoS): The Place of Supply must be outside India. (For digital services and software consulting, Section 13 states the Place of Supply is the location of the recipient).
- Realization of Payment: Payment must be received in convertible foreign exchange (USD, EUR, GBP, etc.) or in Indian Rupees (INR) where explicitly permitted by the RBI (e.g., through Vostro accounts). Payouts from Stripe/PayPal in INR are acceptable if backed by a bank-issued Foreign Inward Remittance Certificate (FIRC).
- Establishments: The supplier and recipient must not be merely establishments of a distinct person (e.g., a branch office in India billing its head office abroad).
Critical Risk: The "Intermediary" Trap
Under Section 13(8)(b) of the IGST Act, if you act as an agent, broker, or broker-like entity matching international buyers with sellers, your service is classified as an Intermediary Service. The Place of Supply for intermediaries is deemed to be the location of the supplier (India), making the transaction subject to 18% GST. Ensure your client contracts specify that you are delivering services directly as an independent contractor, not acting as an agent.
Comparison: LUT Route vs. IGST Refund Route
| Feature | LUT Route (Form RFD-11) | IGST Refund Route |
|---|---|---|
| Upfront GST Payment | ₹0 (NIL). Invoices are issued with 0% GST under LUT. | 18% IGST paid cash-upfront at the time of filing monthly returns. |
| Working Capital Impact | None. No business funds are locked up with the tax department. | High. 18% of your revenue is locked up for 30 to 90 days until the refund is processed. |
| Refund Type | Refund of unutilized Input Tax Credit (ITC) accumulated on business purchases. | Refund of the actual IGST tax paid on export invoices. |
| Application Form | File Form GST RFD-01 on the GST portal to claim ITC refunds. | Refund is processed semi-automatically based on matching export tables in GSTR-1 and GSTR-3B. |
| Ideal For | Freelancers, startups, and agencies wanting to protect cash flow. | Exporters with high domestic purchase tax credits who prefer immediate capital liquidation. |
Step-by-Step LUT Filing Procedure (Form RFD-11)
The Letter of Undertaking (LUT) is valid for one financial year and must be filed online at the start of each fiscal year (April 1st). Here is how to file it:
- Log in to the GST Portal (gst.gov.in).
- Navigate to Services > User Services > Apply for LUT (Letter of Undertaking).
- Select the relevant Financial Year from the dropdown.
- Fill in the fields:
- Tick the three checkboxes confirming that you will export services within 12 months and comply with GST rules.
- Enter the names, addresses, and signatures of two independent witnesses.
- Sign the application using EVC (OTP sent to Aadhaar-linked phone) or DSC and submit.
- Download the submitted application and ARN receipt. You can now issue tax invoices with the note: "Supply of services for export without payment of integrated tax under LUT."
Claiming ITC Refunds under the LUT Route
If you purchase assets like office computers or pay GST on software subscriptions (AWS, GitHub, Slack) under the LUT route, you can request a cash refund for these taxes by filing Form GST RFD-01 monthly or quarterly. The refund is calculated using the formula:
Refund Amount = (Export Turnover / Total Turnover) * Net Input Tax Credit
Ensure that all vendor purchases are visible in your GSTR-2B before claiming the refund to avoid mismatch rejections from the tax officer.
Reference Link: GST Portal Export Guidelines - gst.gov.in