India is a country that has always been heavily reliant on exports for sustaining its economy. In recent years, the Government has implemented several policies to encourage exports and make the process easier for businesses. The introduction of the Letter of Undertaking (LUT) facility was one such policy. However, in recent times, there has been a growing trend of merchant exporters moving towards IGST paid exports, raising the question of whether LUT exports have lost relevance.
Before diving into the relevance of LUT exports, it is essential to understand what the LUT facility entails. An LUT is a document that enables exporters to claim exemption from the payment of Integrated Goods and Services Tax (IGST) while exporting goods or services. The LUT is filed on the GST portal and has to be submitted online. It is a one-time registration process, and once the LUT is issued, it is valid for the entire financial year.
Merchant exporters, who procure goods from manufacturers and then export them, used to prefer LUT exports because it enabled them to procure goods without paying the IGST upfront. This helped them avoid blocked capital and, in turn, reduced their working capital requirement. As a result, merchant exporters could buy goods at a lower cost and export them at a more competitive price. Additionally, LUT exports allowed them to export without any upfront payment, which was beneficial for small and medium enterprises (SMEs) with limited financial resources.
The introduction of the Goods and Services Tax (GST) in 2017 resulted in the simplification of the tax structure for businesses. One of the significant changes brought about by GST was the abolition of the Central Sales Tax (CST) and the introduction of IGST. Under GST, the input tax credit (ITC) mechanism allows businesses to claim credit for the tax paid on purchases while filing their returns. This credit can be used to offset the tax liability on sales or exports.
However, the LUT facility does not allow exporters to claim ITC on the tax paid on inputs. This means that the tax paid on inputs becomes a cost for exporters, which can affect their competitiveness. Moreover, the procedure for obtaining LUT is time-consuming and requires significant documentation, which can be a challenge for SMEs.
On the other hand, IGST paid exports allow exporters to claim ITC on the tax paid on inputs, which reduces their tax liability. This makes IGST paid exports more cost-effective than LUT exports. Additionally, the procedure for IGST paid exports is simpler and faster than LUT exports, which makes it a more attractive option.
The shift towards IGST paid exports has led to a decline in the relevance of LUT exports. While LUT exports are still an option, they are becoming less popular due to the advantages offered by IGST paid exports. However, LUT exports can still be beneficial for small exporters who have limited financial resources and cannot afford to pay the IGST upfront. Additionally, LUT exports may be more suitable for exporters who deal in goods or services that are exempt from tax or have a low tax rate.
The shift towards IGST paid exports is a reflection of the changing business environment in India. While LUT exports have lost some of their relevance, they still have a role to play in certain situations. Ultimately, the choice between LUT exports and IGST paid exports will depend on a range of factors, including the nature of the business, the tax rate applicable to the goods or services, and the financial resources available.
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