What Is Letter Of Undertaking And Purpose Of Using It?

What Is Letter Of Undertaking And Purpose Of Using It?

A Letter of Undertaking is a bank guarantee given by one bank to another on behalf of the customer repaying a loan. A letter of understanding, which is popularly known as the LOU, is also used when an individual imports something from another country.

Under the Goods and Service Tax (GST), the LOU is the document used by the taxpayer to make a declaration to fulfill all requirements under the GST Act.

According to the Central GST Act of 2017, if an individual wants to export goods and services, then it is mandatory to enclose the letter of undertaking with the GST RFD-11 form to generate exports without payment of IGST or the Integrated Goods and Service Tax, which is a tax-free commodity.

What are the benefits of using a letter of undertaking?

There are several benefits that can be availed while using an LOU while exporting goods and services across the world. These include the following:

• Zero-rated supplies to SEZs: The individual exporting the goods and services to SEZs or special economic zones is eligible to avail zero-rated supplies under the GST i.e. s/he will not be required to pay the IGST
• Tax refund for zero-rated supplies: GST that is charged on raw materials for making goods and services is entitled to claim the refund in case you have a letter of undertaking

There are two methods to claim refund. They are:

1. The exporter can elcose the LOU while supplying and claiming the refund. In doing so, the exporter pays IGST before providing supplies and claim the amount once supplied
2. In the second case, once the LOU is filed, it is valid for a financial year that will reduce the burden of the dealer not to apply every time s/he exports a goods and service

• Saves on working capital: Exporters who enclose the letter of undertaking while supplying goods and services are exempted from tax, and the capital can be used for other requirements.

What is the checklist criteria to obtain the LOU?

In order to obtain the LOU, you need to have the following eligibility

• You should export to places that fall under SEZs
• You must be a registered taxpayer
• The goods and services exported should be registered under the GST
• Individuals prosecuted under the CGST Act or IGST Act for tax evasion of Rs 2.5 crore or above will not be eligible for the Letter of Undertaking
• The Letter of Undertaking must be provided under the letterhead of the individual who is registered under the GST
• The LUT can be issued by a managing director, a parter, company secretary, or any person duly signed by the company
• If an individual fails to pay tax within the time mentioned in the LUT, then the facility of supplying without payment will be revoked
• A fresh LUT must be generated each financial year, as it is valid only for 365 days.

How do you apply for the letter of undertaking?

You can get the LUT both offline and online. If you are doing it online, then these are the steps:

• Visit the official page for GST and login
• On the top of the page, click on services tab where you can click on user services
• Here, you will have the option called ‘Furnish Letter of Undertaking’
• Once the page opens, click on the “LUT applied for financial year” box, select the financial year for which you want to file the LUT.
• In case, if your previous period LUT is applied on offline mode, then you are required to annex it by clicking the button “choose file”.
• Next, go through the details that appear on the screen. Here you need to mark the instructions by clicking on the three boxes. By doing so, you will be abiding by the following provisions

1. That you will complete the export of goods within three months from the date of receipt of the export invoice. This can be extended by the commissioner provided you have a valid reason
2. You must abide by the GST laws about export
3. In case you fail to export, then you will be required to pay IGST along with 18% interest from the date of export invoice until IGST is paid.

• You will also be required to submit the name, occupation, and address proof of a minimum of 2 independent witnesses in the box
• Enter the place, from where you are filing your LUT, under the “place of filing LUT” box.
• Click on “save” and after saving the document, you can preview the document before submission by clicking on the “preview” button.
• LUT needs to be signed by any one of the following: the exporter, the partner, the company MD, or the company secretary
• If you are filing your application with the digital signature, then click the proceed button. However, in case you’re doing it via EVC, then you will receive an OTP on your registered phone number. Note the Application Reference Number (ARN) that you get once you enter the OTP.
• Once the application has been successfully submitted, the acknowledgment copy of LUT will be generated. Then download the same by clicking the “download” button.

In case you’re doing it offline, approach a service like Vakisearch, who will guide you with all necessary documentation