GST on Exports: How Zero-Rated Supply and LUT Actually Work

Domestic sales carry GST that eventually lands in the government's account; exports are treated differently on purpose, so that Indian goods and services don't quietly become more expensive the moment they cross the border carrying embedded domestic tax. The law calls this a zero-rated supply, and it's easy to assume that just means exports are tax-free and leave it there. In practice, zero-rating is a mechanism with real paperwork attached: a Letter of Undertaking (LUT) that lets you invoice without charging IGST upfront, a parallel route where you pay the IGST and claim it back afterward, and a set of time limits that decide whether either benefit actually holds up. Missing the mechanics doesn't cost you zero-rating in theory, but it can absolutely cost you the cash-flow benefit in practice.

Zero-Rated Is Not the Same as Exempt

Section 16 of the IGST Act treats three kinds of transactions as zero-rated supply: export of goods, export of services, and supply to a Special Economic Zone developer or unit. The word 'zero-rated' is doing specific work here, and it's worth separating from 'exempt', a term used interchangeably in casual conversation but meaning something quite different under GST. An exempt supply carries no output tax, but the input tax credit on whatever went into making it is blocked or has to be reversed, so that embedded tax becomes a real cost baked into your price. A zero-rated supply also carries no output tax, but you get to keep, and eventually claim back in cash, the credit on everything that went into it. That distinction is what keeps an Indian exporter's pricing genuinely competitive: tax paid on inputs domestically doesn't stay stuck in the product, it comes back. For a supply of services to count as an export in the first place, a handful of conditions all have to hold together at once: the supplier is located in India, the recipient is located outside India, the place of supply is outside India, payment is received in convertible foreign exchange or in Indian rupees wherever the RBI permits it, and the supplier and recipient aren't simply two branches of the same legal entity. That last condition catches group companies more often than expected, since a service billed to your own overseas head office doesn't automatically qualify as an export just because the invoice crosses a border.

Two Ways to Keep Tax From Sitting in Your Working Capital

An exporter has two ways to avoid absorbing IGST as a real cost, and they behave quite differently in terms of cash flow. Under the route most exporters default to, you furnish a Letter of Undertaking and export without charging or paying IGST at all, then periodically claim a refund of the input tax credit that piles up because your sales carry no output tax to set it against. Under the second route, you charge and pay IGST on the export exactly as you would on a domestic inter-state sale, drawing on cash or credit in your electronic ledger, and then claim a refund of that IGST paid. Both routes are meant to land you in the same place economically, zero net tax cost on the export, but they get there on different timelines with different amounts of cash tied up along the way. Not every exporter can freely pick either one: businesses that bring in inputs using duty exemption schemes such as Advance Authorisation or EPCG, or that operate as an Export Oriented Unit, are barred from the pay-and-claim route on those specific supplies and have to use the LUT path instead, since combining a duty exemption on inputs with an IGST refund on output would mean claiming the same benefit twice.

Filing the LUT and Respecting the Export Clock

Furnishing an LUT is deliberately simple: it's filed online in Form GST RFD-11, costs nothing, and is open to any registered exporter except someone who has been prosecuted for tax evasion of ₹2.5 crore or more under GST or an earlier indirect tax law, in which case a bond backed by a bank guarantee takes its place instead. It's valid for one financial year only, so it needs to be filed afresh before the first export invoice of each new year, and most exporters simply build this into their March-end checklist so the new LUT is in place before April's first shipment. Filing an LUT doesn't make the underlying export requirement disappear, though. For goods, the actual export has to happen within three months of the invoice date, extendable by the proper officer where there's a genuine reason for delay; for services, payment has to actually be received in convertible foreign exchange, or in rupees wherever RBI rules permit it, within whatever window FEMA regulations allow at the time. Miss that window on a given shipment and the LUT doesn't cover it retroactively: IGST becomes payable on that specific invoice along with interest, even though every other shipment under the same LUT remains perfectly fine.

Claiming the Refund Once the Export Is Done

For exporters working under LUT, the refund of accumulated ITC is claimed through Form RFD-01 on the GST portal, backed by a statement of the relevant invoices and, for goods, shipping bill details, or for services, proof of receipt of foreign exchange such as a bank realisation certificate. The amount you can actually claim isn't simply whatever ITC balance sits in your ledger; it's worked out through a formula that ties the refund to how much of your total turnover in that period came from zero-rated supply, so a business that also sells domestically only gets the portion of credit attributable to its export turnover. For the payment-of-IGST route on goods, the process is lighter in one sense: the shipping bill itself functions as the refund application once your export general manifest and GST returns line up, and the amount is typically credited straight to the bank account linked to your export code without a separate manual filing. Either way, a refund claim generally has to be filed within two years of the relevant date, so accumulated credit isn't something to let sit indefinitely. In practice, the single biggest reason refunds get delayed on either route is a mismatch between the shipping bill, the GST returns, and the export manifest, three records meant to tell the same story that very often don't, usually because they're prepared by different teams within the same company.

None of this changes the basic promise GST makes to exporters: tax shouldn't travel with the goods once they leave the country. What changes is how quickly that promise turns into cash in your account, and that depends entirely on whether the LUT was filed on time, whether the export or the foreign remittance actually happened inside the allowed window, and whether your own records agree with what customs and your GST returns say. Businesses that treat these as routine monthly hygiene, rather than something to reconstruct at refund time, tend to see that cash land in weeks rather than months.