Utilizing Bonds and Letters of Undertaking for GST Exports

Governments of developing nations aim to bolster their export base to ensure a positive balance of payments, foster employment, and stimulate economic expansion. To support this objective, governments offer specific advantages and relief measures for exports, enabling traders to engage in beneficial and seamless international trade. Under the Goods and Services Tax (GST) framework, the Indian government extends similar benefits to exporters, ensuring that goods and services exported from India incur no net tax liability.

Under the GST regulations, exporters have two primary choices:

• Export goods or services under a bond without paying tax.
• Export goods or services with tax payment, subsequently claiming a refund.

Overview of IGST Refund on Exports

GST laws allow exporters to pay Integrated Goods and Services Tax (IGST) on exports and then claim a refund. The process for claiming this refund has been streamlined for export businesses. For exporting goods, services, or both, a separate refund application (GST RFD-01) is not required.

The shipping bill submitted by the exporter automatically serves as a refund claim. Exporters apply IGST on their export invoices at the rates applicable to their specific goods and services. Upon paying IGST, a refund can be sought for two components:

• Unutilized input tax credits (ITC) on goods and services.
• The IGST paid on the export of goods or services.

The law mandates that the shipping bill functions as a refund claim if two conditions are met:

• The person transporting the export goods must file an export manifest.
• The applicant must have duly filed returns in Form GSTR-3B. The refund process commences upon filing Table 6A in Form GSTR-1.

Once these documents are properly submitted, the refund is processed by the relevant department.

Steps for Claiming IGST Refund on Exports

For detailed instructions on accessing, entering, and filing Table 6A in GSTR-1, refer to this comprehensive guide. The information provided in Table 6A must correspond precisely with the invoice details and shipping bills uploaded to the ICEGATE portal by exporters.

The procedure for uploading documents to the ICEGATE portal includes:

• Step 1: Prepare documents in the required PDF format for portal upload.
• Step 2: Log in to the ICEGATE portal. A Digital Signature Certificate (DSC) is mandatory for document uploads.
• Step 3: Navigate to the e-SANCHIT tab for uploading documents.
• Step 4: Click the 'upload documents' button. Up to five documents can be uploaded in a single batch.
• Step 5: Select the documents from the dropdown list for upload. All documents must be digitally signed before uploading.
• Step 6: Verify the DSC on each document by clicking the ‘Validate Document’ button.
• Step 7: Click 'submit documents'. A disclaimer will appear, requiring acceptance of responsibility for the authenticity of the uploaded documents.
• Step 8: After successful submission, a unique IRN (Indian Revenue Number) will be generated for future reference.

When to File Form RFD-01 / RFD-01A for Export Tax Refunds

Any unutilized excess Input Tax Credit (ITC), or amounts paid incorrectly, or surplus funds in the cash ledger can be claimed by filing Form GST RFD-01 (for online submission) or GST RFD-01A (for manual submission). A straightforward form needs to be completed and submitted to the department for these refund claims.

The form requires the following information:

1. Allotted GSTIN or Temporary ID.
2. Legal name.
3. Trade name (if applicable).
4. Address of the primary business location.
5. Tax period for which the refund is claimed (if relevant).
6. Amount of IGST, CGST, SGST, interest, or cess (if any).
7. Stated grounds for the refund claim (chosen from a provided list).
8. Bank account details for crediting the refund.
9. Indication (Yes/No) whether supporting documents, as per Annexure 1 for the selected reason, are required.
10. Verification: Must be signed by an authorized individual.

Specific time limits and submission frequencies for Form GST RFD-01/01A are outlined as follows:

• Time limits: The form must be filed within two years from the relevant date.
• Frequency of filing: Exporters are required to file Form RFD-01/01A on a monthly basis.

Within 15 days of receiving the refund application, the officer reviews and verifies the completeness and accuracy of all submitted details. Form RFD-02 serves as an acknowledgment of the filed application. Should any details be missing or incorrect, the assessing officer will notify the exporter via Form RFD-03, which then requires updating and refiling.

During the processing of unutilized ITC refund claims, both the value of goods declared in the GST invoice and the corresponding shipping bill/bill of export are scrutinized. If these values differ, the lower of the two values will be approved for the refund. If an exporter opts to export by furnishing a Bond, they are exempt from paying taxes on such sales.

Understanding Letters of Undertaking (LUT) and Bonds

Letter of Undertaking (LUT)

An LUT functions similarly to a bank guarantee, enabling a bank's customer to secure short-term credit from an overseas branch of another Indian bank. The primary purpose of such undertakings is to assure that the vessel or aircraft owner will:

• Maintain security on the vehicle.
• Appear in court to acknowledge ownership.
• Settle any final judgment issued against the vehicle, regardless of whether it is lost.

Bonds

A bond is a financial instrument where the issuer owes a debt to the holders and is obligated to pay interest or repay the principal amount at a future date. These instruments are typically highly secured, liquid, and often negotiable, allowing for transfer of ownership.

Common bond types include municipal and corporate bonds. When bonds are furnished for exports, a B-1 Surety / Security (General Bond) is commonly used. These bonds involve a surety, an additional party who guarantees the performance of the obligor (the entity providing the bond).

Eligibility for Using Letter of Undertaking (LUT) and Bonds for Exports

Any registered taxpayer involved in exporting goods or services can utilize LUTs. However, individuals prosecuted for tax evasion amounting to Rs. 2.5 Crores or more under the relevant act are ineligible to furnish LUTs.

An LUT is valid for one financial year (until March 31st). Exporters are required to submit a new LUT for each financial year. If the conditions specified in the LUT are not met within the stipulated timeframe, the associated privileges are revoked, and the exporter must instead provide bonds.

For all other taxpayers, including those who have been prosecuted for tax evasion of Rs. 2.5 Crores or more under GST laws, bonds must be provided if exports are conducted without IGST payment. Letters of Undertaking can be submitted online through the GST portal.

Conversely, bonds require manual submission, as a physical copy must be remitted to the department. Examples of transactions where LUTs or Bonds can be employed include:

• Zero-rated supply to Special Economic Zones (SEZ) without IGST payment.
• Export of goods to countries outside India without IGST payment.
• Providing services to international clients without IGST payment.

Consequences of Non-Export or Delayed Export

According to Rule 96A of the CGST Rules, an exporter becomes liable to pay taxes, along with interest, if:

• Goods are not exported outside India within three months of the export invoice date. Tax payment is due within 15 days following the end of this three-month period.
• Services are not rendered, or payment for goods is not received in convertible foreign exchange within one year. Tax payment is due within 15 days after the expiry of this one-year period.
• Form GSTR-1, detailing export invoices, must be filed with confirmation that goods have been exported from India.
• If goods are not exported and the taxpayer fails to make the corresponding payment, the amount will be recovered as per Section 79 of the Act, and the export benefit will be withdrawn.
• Upon payment, the export status is reinstated. Similarly, if exports occur after the three-month window, the benefits are restored.

Procedure for Filing Letter of Undertaking (LUT) and Bonds for Exports

Learn how to file a Letter of Undertaking when exports are made without tax payment. Below are the steps for filing and furnishing Bonds for exports conducted without tax payment:

Step 1: Determine the furnishing requirements (whether an LUT or a Bond is needed) and identify the correct jurisdiction. If a Bond is required, additional documents related to bank guarantees must also be prepared.

Step 2: Prepare the necessary documents for Bonds. The following documents are required:

• Form RFD-11 on company letterhead.
• Bond on stamp paper.
• Bank guarantee.
• Authority letter (e.g., if the Managing Director signs the bond, a copy of the Board Resolution authorizing them to act on behalf of the company is necessary).
• Other supporting documents.

Exporters do not need to furnish a separate bond for each consignment. Instead, they can use a 'Running Bond'. With a Running Bond, the same terms and conditions apply to subsequent consignments. For instance, if an exporter provides a Running Bond for Rs. 2 Crores, they can export goods with taxes up to Rs. 2 Crores across multiple transactions. Once the bond conditions are met, the allocated amount becomes available again for future export transactions.

Step 3: Prepare a duplicate copy of all documents, in addition to the office copy.

Step 4: Submit the documents to the department and ensure they are verified by the relevant officer to prevent rejections and resubmissions.

Step 5: A signed acknowledgment letter will be issued by the officer within 2 to 3 days of document submission.

Format of LUT and Bonds in RFD-11

Form for LUT:

• Registered Name
• Address
• GSTIN
• Date of furnishing
• Signature, date, and place
• Details of witnesses (Name, address, and occupation)

Contents of Bonds:

• Registered Name
• Address
• Amount of bond furnished
• Date of furnishing
• Amount of bank guarantee furnished
• Signature, date, and place
• Details of witnesses (Name, address, and occupation)