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August 14, 2025

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Basics of GST

Has LUT for Exports Lost Relevance? Why Merchant Exporters Prefer IGST

The modern export sector of India depends heavily on merchant exporters who facilitate foreign currency transactions and international trading alliances. Before GST implementation, many exporters chose the Letter of Undertaking (LUT) for exporting their products to skip paying GST before export. Today, merchants who conduct exporting activities show rising inclinations to fulfil their IGST obligations rather than using LUTs.

So, what’s driving this shift? Has the LUT route lost its relevance in the evolving GST framework? In this blog, we’ll explore the reasons behind this transformation, the pros and cons of both methods, and help you understand why merchant exporters are increasingly leaning toward IGST.

What is LUT in GST?

Under the Goods and Services Tax (GST) regime in India, exporters have two options:

Export under LUT without paying IGST.

Export on payment of IGST and claim refund later.

A Letter of Undertaking (LUT) is a document that allows exporters to ship goods or services without paying IGST. Instead, they undertake to comply with all export conditions and complete the export within the stipulated period (usually 3 months from invoice date).

This route is popular for working capital efficiency because there's no need for upfront tax payment.

What is the IGST Route?

Under the IGST (Integrated Goods and Services Tax) payment route, exporters pay tax at the time of export and then claim a refund of the IGST paid.

While this may initially seem like a burden, many merchant exporters prefer this route today due to its speed and clarity in refunds, among other reasons we’ll cover next.

Who are Merchant Exporters?

As a merchant exporter, one participates in export trading of items without operating as a manufacturer of those goods. Local manufacturers and suppliers provide merchant exporters with products that get distributed internationally to foreign customers.

This business model has its intricacies—such as relying on third-party manufacturers, managing input tax credit (ITC) properly, and ensuring compliance on both procurement and export fronts.

Get to Know About Merchant Export under GST!

Why LUT is Losing Its Charm Among Merchant Exporters

Here are some of the key reasons why LUT is no longer the go-to option for many merchant exporters:

1. ITC Blockage and Refund Delays

Merchant exporters often purchase goods on payment of GST.

When they export under LUT, they can't claim the refund of IGST, only the unutilized Input Tax Credit (ITC).

Refunds of ITC (especially on capital goods or blocked credits) are subject to greater scrutiny and delays.

On the other hand, IGST refunds are automated and faster, often processed within 7–15 days.

2. Working Capital Efficiency

Although LUT avoids upfront tax payment, the accumulated ITC often remains stuck in the system.

This leads to working capital pressure, especially for exporters with thin margins.

IGST route, despite requiring upfront payment, provides quick liquidity via refund of IGST, which can be rotated into new transactions efficiently.

3. Ease of Processing and Less Bureaucracy

IGST refunds are system-driven, minimizing human intervention.

LUT-based ITC refunds require manual verifications, invoice matching, and compliance checks, leading to increased time and cost.

Also, multiple refund applications may be needed when claiming ITC across various heads (CGST, SGST, IGST).

4. Complexity in LUT Maintenance

Exporters must renew the LUT every financial year.

Any non-compliance, like delay in export realization, can invalidate the LUT, leading to potential penalties.

Many merchant exporters prefer to avoid this compliance headache by opting for the IGST route.

Why IGST Route is Gaining Preference

Let’s now look at why the IGST route is becoming the new favorite:

1. Fast Refund Process

As per CBIC, IGST refund claims are processed automatically upon shipping bill and EGM (Export General Manifest) filing.

The refund is credited directly to the exporter’s bank account linked with GSTIN.

No separate refund application is needed in many cases.

2. Transparency and Predictability

IGST refund timelines are more predictable.

System-generated acknowledgments and real-time tracking provide peace of mind to exporters.

3. Better for High-Volume Exporters

For those involved in frequent or high-value exports, IGST ensures faster capital turnaround.

Helps them maintain better cash flow cycles, and ultimately increase their global competitiveness.

4. Fewer Refund Rejections

LUT-based ITC refunds often get stuck due to minor mismatches in GSTR-1 vs GSTR-3B, HSN mismatches, or vendor-side errors.

IGST refunds, however, are linked to shipping bills and the EGM filed with Customs, making them less prone to rejection.

IGST vs LUT – A Quick Comparison Table

Feature	LUT Export	IGST Export
Upfront GST Payment	No	Yes
Refund Type	Refund of accumulated ITC	Refund of paid IGST
Refund Time	Delayed, manual process	Fast, automatic
Best For	Small exporters with limited ITC	High-volume, merchant exporters
Bureaucracy/Documentation	High	Low
Cash Flow Impact	ITC blockage	Fast liquidity
Risk of Rejection	Higher (due to ITC scrutiny)	Lower (system-linked)

Practical Scenario – A Case Study

Let’s say a merchant exporter procures goods worth ₹50 lakhs + 18% GST (₹9 lakhs). Here's how the situation plays out in both scenarios:

Under LUT:

No IGST is paid on export.

₹9 lakhs remain as unutilized ITC.

Refund claim for ITC takes 30–60 days.

Cash flow stress during this period.

Under IGST:

₹9 lakhs paid as IGST at the time of export.

Refund processed in 7–15 days post-shipment.

Liquidity restored faster, enabling more trade cycles.

Regulatory Encouragement for IGST Refunds

CBIC and the GSTN network have been constantly streamlining the IGST refund system:

ICEGATE portal integration allows exporters to track refund status.

Many IGST refund claims are processed without manual intervention, making the system more trustworthy.

Special refund drives and circulars are often issued to clear pending refunds, showing policy support for this route.

Should LUT Be Abandoned?

Not necessarily. LUT still holds relevance for:

Service exporters, who don’t deal with physical goods.

Exporters with limited or no input tax credit (e.g., service-based startups).

One-time exporters or low-volume exporters who want to avoid the hassle of IGST payment.

However, for merchant exporters dealing with high turnover, recurring exports, and large tax credit volumes, the IGST route is more viable.

Conclusion

Until the implementation of IGST refunds, the system needed LUT to facilitate easier export tax compliance, but the new process now dominates the space. The IGST route benefits merchant exporters by providing quick and accessible transactions together with simplified procedures because they primarily need frequent shipments and complex procurement frameworks.

LUT maintains value in the modern GST structure, although the advantage it offers stands secondary to the advantages provided by IGST refunds. The advancement of automated systems along with enhanced refund processing is expected to drive exporters toward IGST routes for their operations in the upcoming period.

Learn how to apply IGST on Swipe billing software!

FAQs

1. What is the difference between LUT and IGST in export under GST?

LUT allows exporters to ship goods without paying IGST, while IGST involves paying tax on export and claiming a refund. IGST refunds are faster and system-driven, making them preferred by many exporters.

2. Why are merchant exporters preferring IGST over LUT in 2025?

Merchant exporters prefer IGST due to quicker refund processing, reduced documentation, better working capital management, and fewer refund rejections compared to LUT-based exports.

‍3. Is LUT still required for exporting services without IGST?

Yes, service exporters must file a Letter of Undertaking (LUT) annually if they wish to export services without paying IGST under GST rules.

4. Can a merchant exporter switch between LUT and IGST routes?

Yes, exporters can choose either the LUT or IGST route for each export transaction, but they must follow the correct compliance procedures for the selected method.

5. How long does it take to get an IGST refund after export?

Customs processes IGST refunds after a correct filing of shipping bills and Export General Manifest (EGM), which takes between 7 to 15 days.

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