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GST Refund Mechanism for Export of Services under GST

GST Electronic Ledger System

GST Refund Mechanism for Export of Services under GST

The blog outlines the GST refund mechanism for export of services, explaining the legal provisions, eligibility criteria, and refund process. Below is a structured summary:

Definition of Export of Services (Sec 2(6) IGST Act)

A transaction qualifies as an export of services if:

  • Supplier is in India
  • Recipient is outside India
  • Place of supply is outside India
  • Payment is received in convertible foreign exchange
  • Supplier & recipient are not merely establishments of the same entity

Zero-Rated Supplies (Sec 16 of IGST Act)

Exports are considered zero-rated under GST, meaning:

  • No GST is levied on the supply.
  • Input tax credit (ITC) can be claimed.
  • Zero-rated supplies include:
    Export of goods/services
    Supply to SEZ units or SEZ developers

Refund Mechanisms for Exporters

As per Sec 16(3) of IGST Act, two refund options are available:

Option 1: Export Without Payment of IGST (Under Letter of Undertaking/Bond)

  • The exporter does not pay IGST on exports.
  • Can claim a refund of unutilized ITC on inputs/input services.
  • Refund is filed through Form RFD-01.

What is a Letter of Undertaking (LUT)? 

Export of goods

  • A Letter of Undertaking is a declaration filed in Form GST RFD-11 that allows exporters to ship goods or provide services without charging GST, provided they receive the export proceeds in convertible foreign exchange within 3 months.

Why file an Letter of Undertaking (LUT) ?

Letter of Undertaking

  • Exports are treated as zero-rated supplies, eliminating the need to pay IGST upfront. Since tax is not paid on exports, businesses can use their working capital more efficiently. Avoids the hassle of claiming GST refunds on export transactions. If an exporter does not file an Letter of Undertaking, they must pay IGST on exports and claim a refund later.
  • GSTN has enabled the functionality to file a Letter of Undertaking for FY 2025-26 on the GST portal. If you’re an exporter, filing an Letter of Undertaking is crucial to export goods or services without paying IGST upfront.

How to File Letter of Undertaking for FY 2025-26?

Letter of Undertaking 1

  • Log in to the GST Portal (gst.gov.in)
  • Navigate to Services > User Services > Furnish Letter of Undertaking
  • Select the financial year 2025-26
  • Upload required details & submit the form GST RFD-11
  • Download the acknowledgment for records

Key Conditions & Risks: The export proceeds must be realized within 3 months; otherwise, the government may demand GST along with interest.  Failure to meet Letter of Undertaking conditions can lead to tax liabilities and penalties. Exporters should file their Letter of Undertaking at the earliest to ensure smooth tax-free exports in FY 2025–26!

Option 2: Export With Payment of IGST

  • IGST is paid at the time of export.
  • Refund of IGST paid is automatically processed upon filing GSTR-1 & GSTR-3B.
  • No separate refund application is needed.

GST Refund Application (Sec 48 of CGST Act)

  • GST refund must be applied within 2 years from the relevant date.
  • The application should include:
    • Proof of tax payment.
    • Evidence that the tax burden has not been passed to another person.
  • If GST refund claim is below INR 5,00,000/-, a self-declaration is sufficient.
  • For Export of Services: Relevant date for refund application:
    • Date of foreign exchange receipt, if service was provided before payment.
    • Invoice date, if payment was received in advance.

Provisional GST Refund Process

  • 90% of the refund is sanctioned on a provisional basis.
  • The remaining amount is refunded after verification.

Key Points & Transitional Provisions

  • If a refund is not processed within 60 days, interest is payable by the government.
  • Old service tax refund claims (before GST) are handled under previous laws.
  • Rejected ITC refund claims under earlier laws will lapse.
  • Exporters should file for refunds timely to avoid missing deadlines.
  • Taxpayer must Ensure correct documentation (Foreign Inward Remittance Certificate (FIRC), invoices, etc.). and
  • GST Taxpayer should Choose between LUT or IGST payment based on cash flow needs.
  • Errors in GSTR-1 or GSTR-3B can cause refund delays—cross-check before filing.
  • If the Letter of Undertaking application is not processed by Tax Official, or any notice for clarification is not issued by the Tax Official within 3 working days, then the application will be deemed approved and the status of Letter of Undertaking application will change to “Deemed Approved”
  • No liability on SEZ unit to pay GST under RCM on services of advocate subject to furnishing a LUT or a bond: AAR

Need help with Letter of Undertaking filing or GST Filling? Let me know

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Legal Disclaimer:
The information / articles & any relies to the comments on this blog are provided purely for informational and educational purposes only & are purely based on my understanding / knowledge. They do noy constitute legal advice or legal opinions. The information / articles and any replies to the comments are intended but not promised or guaranteed to be current, complete, or up-to-date and should in no way be taken as a legal advice or an indication of future results. Therefore, i can not take any responsibility for the results or consequences of any attempt to use or adopt any of the information presented on this blog. You are advised not to act or rely on any information / articles contained without first seeking the advice of a practicing professional.