Exporters play a crucial role in international trade as they act as engines for economic expansion and the integration of world markets. The ‘Letter of Undertaking’ (LoU) is a crucial instrument that exporters can use to their advantage amongst the maze of rules and procedures. This legal instrument offers substantial tax exemptions and facilitates easy export transactions, creating an atmosphere favourable to trade and business. In this blog, we explore the subtleties of the Letter of Undertaking and its vital function in providing exporters with tax advantages.
Every trader aspires to grow their company by extending deals nationally and internationally. The government has put in place several measures to support these traders in increasing their exports and improving the efficiency of their enterprises. One of the main ones is the Goods and Services Tax (GST), a single national tax. Furthermore, a Letter of Undertaking agreement has been developed that permits exporters to export goods without paying IGST (Integrated Goods and Services Tax).
What is a Letter of Undertaking?
A legal document that certifies a party’s commitment and willingness to carry out a certain activity or obligation is called a Letter of Undertaking (LOU). This type of document is usually provided in a corporate or financial setting. LOUs are frequently used to build confidence and offer assurances to parties engaged in a transaction or agreement. Here are a few typical applications for a letter of undertaking:
- Trade and Commerce:
LOUs are frequently used in international trade to ensure a supplier gets paid. For instance, a buyer’s bank might send a letter of credit to the seller’s bank, pledging to spend on the buyer’s behalf once the agreed-upon transaction is complete. This promotes trust and eases trade across borders.
- Employment:
Employers have the authority to provide workers with letters of understanding (LOUs) that specify the terms and circumstances of their employment, including duties, pay, benefits, and other pertinent information. This functions as a formal contract between the worker and the company.
- Financial Transactions:
To pledge to provide financial services, credit facilities, or guarantees, banks and other financial institutions may issue letters of understanding (LOUs) to counterparties or clients. These letters of intent can be applied to many financial transactions, including credit facilities, loans, and project funding.
- Legal Matters:
LOUs can be issued in legal situations to attest to a party’s or organisation’s commitment to abide by particular legal requirements or activities, such as paying debts, completing court-ordered obligations, or resolving disputes.
- Immigration and Visa Applications:
Some nations may request an LOU when a person applies for a visa or immigration status. This letter confirms that a host or sponsor will support the applicant during their stay.The parties, the undertaking’s goal, particular terms and conditions, and any other pertinent information are usually included in a letter of assignment. The pledges stated in the letter are anticipated by the issuer, and it is a legally binding document. If you don’t, there can be legal repercussions.
Depending on its particular application and the legal requirements of the jurisdiction in which it is employed, a letter of understanding’s structure and content may change. When creating or handling Letters of Undertaking, seeking advice from legal counsel or financial professionals is recommended to ensure all legal and regulatory requirements are met.
Eligibility for submitting LUT
The LUT may be submitted by anyone registered under the GST Act. Those who have been summoned for tax evasion are the lone exception. This means the sum above Rs. 2.50 lacs per the 2017 IGST or GST regulations. If the person cannot submit the LUT, they may still offer the export bonds to export the items.
Format of the Letter of Undertaking
The following information has to be filled out under the LUT:
- Product and Service Tax Identification Number, or GSTIN
- Name listed with the GST
- Document type (Bond/LUT)
- Date of furnishing
- Identifying mark and signature
- Witness specifics
- Bank assurance
After it is provided, the LUT is valid for an entire year. The form must be provided by the person again after its expiration date. At the GST portal, it can be completed promptly online.
Documents Required for LUT
The following is a list of the documents that must be presented with the LUT:
- LUT cover letter of acceptance.
- A duplicate of the registered GST certificate.
- GST RFD 11 form: A pair of the initial form sets.
- Original LUT Annexure notarised (two sets). Two witnesses must also be present in addition to these.
- Request that the bank manager verify the digital signatures.
- Witnesses must present their PAN cards and identification. Every detail in the LUT needs to match the ID exactly.
- The individual’s PAN card must be shown.
- The Bond Incorporation certificate, proof of the company’s incorporation, must be produced. If a partnership exists, the Partnership Deed needs to be sent in.
- Self-certification on official letterhead as eligible.
- A list of all the export sales invoices. The chartered accountant must validate and certify these bills.
- An IEC code copy.
Furnishing the LUT
Previously, LUT’s entire process was carried out offline. However, there are no easy ways to provide the LUT online in a few short steps. The actions to take are listed below:
- First, use the user ID and password you were supplied to log in to www.gst.gov.in.
- Choose the “User Services” tab from the “Services” menu.
- Select the “Furnish Letter of Undertaking” option from the drop-down menu.
- A new page appears with all the information mentioned, such as the trade name, GSTIN, registered name, etc. Choose the fiscal year from the list on the same page.
- You can upload the LUT document if it is provided manually.
- Next, complete the form that displays on the screen with all the LUT’s details. It should be noted that the witness’s details must match those on the bank statements and guarantee.
- Last, the designation and signature must be entered together with the filing location. (Note: Once a signature is submitted, it cannot be changed.)
- Finally, there are two ways to submit the form. One has a digital signature certificate (DSC) and the other an electronic verification code (EVC). The Application Reference Number (ARN) is necessary for both.
- Lastly, the acknowledgement for the Letter of Undertaking (LUT) can be downloaded after all the requirements have been finished.
In addition to the LUT, exporters can use the bond submission method, which calls for comparable procedures and practices to be followed. The only difference is the bank guarantee requirement, which requires the bond to be presented along with a 15% bank guarantee of the entire amount.
Conclusion
The Letter of Undertaking is an essential tool for exporters since it provides access to simplified export procedures and tax benefits. Through the promotion of international trade and global market integration, it fosters smooth trade operations and helps the country’s economy expand. Exporters need to understand how important it is to follow the rules outlined in the LoU since doing so guarantees continued trade flow and maintains the long-term advantages of tax exemptions.
