IGST vs LUT for Exporters: Which Saves More?

Two Ways to Zero-Rate Exports

Under the GST regime, exports from India are treated as "zero-rated supplies" under Section 16 of the IGST Act. This means no GST burden should ultimately fall on the exporter. But the law gives you two distinct paths to achieve this:

• Method A. Pay IGST on export. You charge and pay IGST on the export invoice at the applicable rate (5%, 12%, 18%, or 28%). The IGST is automatically refunded to you via the shipping bill route through the ICEGATE-GSTN electronic link. No separate refund application is needed.
• Method B. File a Letter of Undertaking (LUT). You file Form RFD-11 on the GST portal before exporting. Once accepted, you export without paying any IGST. Your input tax credit (ITC) on domestic purchases accumulates, and you claim it back by filing Form RFD-01 manually.

Both methods achieve the same end result. Zero tax on exports. The difference is in cash flow, paperwork, and how long your money stays locked up with the government. For most exporters, this is not a theoretical distinction. It directly hits your bank balance every month.

The IGST Payment Method

The IGST route is the simpler of the two. You treat the export like any other taxable supply. Charge IGST on the invoice, pay it in your GSTR-3B return, and report the export in GSTR-1 Table 6A with the shipping bill number and port code.

The refund happens automatically. ICEGATE (customs) transmits the shipping bill data to GSTN, which matches it against your GSTR-1 declaration. If the data matches (GSTIN, invoice number, taxable value, IGST amount, shipping bill number, and port code all line up) the refund is sanctioned without any manual application.

IGST Method: How it works

• No separate refund application. The ICEGATE-GSTN link handles it electronically.
• Typical refund timeline: 30-60 days from the date of shipping bill filing, assuming data matches.
• ITC is consumed against IGST liability. Your input credits get utilised in GSTR-3B against the IGST you owe, so ITC does not accumulate.
• Simpler compliance. No RFD-01 filing, no CA certificate, fewer documents.

The LUT Method

With a valid LUT in place, you export without paying any IGST. Your export invoices carry a zero tax line, and the shipping bill is filed without an IGST component. This means no money leaves your bank account towards GST on exports.

The trade-off is that your ITC on domestic purchases (GST paid on raw materials, services, rent, utilities) keeps accumulating because there is no output IGST liability to set it off against. To recover this accumulated ITC, you must file Form RFD-01 on the GST portal, supported by a statement of invoices, a CA/CS certificate (for refunds above Rs 2 lakh), bank realisation certificates, and shipping bill copies.

LUT Method: How it works

• Zero upfront cash outflow. No IGST payment means your working capital stays in your business.
• ITC refund via RFD-01. File monthly or quarterly (matching your return period) to claim back accumulated input credit.
• RFD-01 processing: 60-90 days typically, sometimes longer if the officer raises queries or issues a deficiency memo.
• More documentation. Statement of invoices, CA certificate, BRC copies, and a detailed refund computation.

Working Capital: The Real Cost

The biggest difference between IGST and LUT is not compliance. It is cash flow. Let us run the numbers on a realistic example.

Example: Rs 1 Crore export, 18% GST rate

Under the IGST route, you pay Rs 18 lakh in IGST. You utilise Rs 8 lakh of ITC against this in GSTR-3B, so the net cash outflow is Rs 10 lakh. This Rs 10 lakh sits with the government for approximately 60 days. At a cost of capital of 10% per annum, that is roughly Rs 16,438 in interest cost. Money you could have deployed in production, inventory, or debt repayment.

Under the LUT route, you pay nothing upfront. Your Rs 8 lakh of ITC accumulates, and you file RFD-01 to claim it back. The refund takes longer (60-90 days), but you never had to part with the Rs 10 lakh in the first place.

Scale this to a company doing Rs 10 crore in annual exports, and the working capital cost of the IGST route adds up to Rs 1.6-3.3 lakh per year. A real cost that directly reduces your margin. If your refund gets delayed to 120 days (not uncommon), the cost doubles.

When IGST Wins

Despite the working capital disadvantage, the IGST route is the better choice in several specific situations:

• Low-ITC businesses (trading companies). If you are a merchant exporter who buys finished goods domestically and exports them, your ITC is already high relative to your output. Paying IGST lets you utilise this ITC in GSTR-3B, effectively flushing out accumulated credit without filing RFD-01. For traders with ITC close to or exceeding 90% of output, the IGST route is simpler and avoids the RFD-01 documentation burden entirely.
• New exporters not eligible for LUT. To file an LUT, you must either have exported goods or services worth Rs 1 crore in the preceding financial year, or have received foreign inward remittances of at least 10% of your turnover. New exporters who do not meet either threshold must use the IGST route (or furnish a bond with a bank guarantee, which ties up even more capital).
• Inverted duty structure. If the GST rate on your inputs is higher than the rate on your output (for example, you buy raw materials at 18% and export a product classified at 5%), ITC accumulates faster than you can use it. Paying IGST at the output rate and claiming the full IGST refund via shipping bill can be more efficient than filing RFD-01 for the inverted duty refund, which has its own formula limitations under Rule 89(5).
• Companies with strong cash reserves. If tying up Rs 18 lakh for 60 days is not a strain on your treasury, the simplicity of the IGST route (no RFD-01, no CA certificate, automatic refund) can save you more in compliance costs than the working capital cost you incur.

When LUT Wins

For the majority of established exporters, the LUT route is the superior option. Here is when it clearly wins:

• Manufacturers with significant ITC. If you buy raw materials, pay rent, use logistics services, and incur GST on utilities, your monthly ITC is substantial. Under LUT, this ITC accumulates cleanly and is refunded via RFD-01. You never have to part with working capital to pay output IGST.
• High-value shipments. The working capital cost scales linearly with shipment value. A single Rs 5 crore export at 18% means Rs 90 lakh in IGST paid upfront. At 10% cost of capital and a 60-day refund cycle, that is Rs 1.48 lakh per shipment in pure interest cost. LUT eliminates this entirely.
• Exporters with tight margins. In sectors like textiles, leather, and commodity chemicals where margins are 5-10%, a working capital cost of 0.15-0.30% of export value is material. LUT preserves margin by keeping cash in the business.
• Frequent exporters. If you ship 20-50 consignments per month, the cumulative IGST outflow at any given time can be enormous. LUT keeps your cash cycle predictable and your bank balance stable.
• Service exporters. Software, consulting, and other service exports under GST on export of services benefit heavily from LUT since there is no shipping bill mechanism for automatic IGST refund. Service exporters paying IGST must file RFD-01 anyway.

LUT Eligibility and Filing

Filing an LUT is straightforward, but you must meet the eligibility criteria and renew it each financial year.

Who Can File an LUT?

Any registered person who exports goods or services can file an LUT, provided they have not been prosecuted for any offence under the CGST Act or the IGST Act where the tax evaded exceeds Rs 2.5 crore. There is no minimum turnover requirement to file an LUT itself. The Rs 1 crore threshold applies only to filing an LUT without a bond. In practice, most exporters file the LUT directly on the GST portal without a bond.

How to File

LUT Filing Steps

• Log in to the GST portal and navigate to Services → User Services → Furnish Letter of Undertaking (LUT).
• Select the financial year for which you are filing the LUT (e.g., 2026-27).
• Fill in the details of two witnesses (name, address, occupation). These are typically company directors or senior employees.
• Submit with DSC (Digital Signature Certificate) or EVC (Electronic Verification Code).
• The LUT is auto-approved in most cases. Download the acknowledgment and keep it on file.

Common Mistakes to Avoid

Mixing up the two methods or getting the compliance details wrong can lead to refund rejections, tax demands, and unnecessary interest costs. These are the mistakes we see most often:

Filing both IGST and LUT for the same shipment

You cannot claim IGST refund via shipping bill and also claim ITC refund via RFD-01 for the same consignment. The system will reject one of them, and untangling the mismatch involves lengthy correspondence with your jurisdictional officer. Choose one method per shipment and ensure GSTR-1 Table 6A reflects it correctly.

Not filing RFD-01 within the time limit

Under the LUT route, you must file RFD-01 within two years from the relevant date (typically the date of export). If you let ITC accumulate for months without filing, you risk missing the deadline on older invoices. File monthly or quarterly to stay current.

GSTR-1 Table 6A errors

Table 6A of GSTR-1 is where you declare export details. Common errors include wrong shipping bill numbers, mismatched port codes, invoice values that do not match the shipping bill, and selecting "with payment of tax" when you exported under LUT (or vice versa). Any mismatch here blocks the automatic IGST refund and complicates RFD-01 processing. For a full walkthrough, see our GST for exporters guide.

Exporting under LUT without a valid LUT on file

If your LUT has expired (new financial year) or was never filed, exporting "without payment of tax" creates a tax liability. The department can demand the IGST along with interest at 18% per annum from the date of export until payment.

Decision Framework

Use this table to quickly identify which method suits your business profile:

Frequently Asked Questions

Can I use both IGST payment and LUT for different shipments in the same financial year?

Yes, you can use the IGST payment route for some shipments and the LUT route for others within the same financial year. However, you cannot apply both methods to the same shipment. Once you file an LUT, all subsequent exports should ideally follow the LUT route unless you have a specific reason to pay IGST on a particular consignment (for example, to utilise accumulated ITC when you have an inverted duty structure). Make sure your GSTR-1 Table 6A correctly reflects which method was used for each shipping bill.

What happens if my LUT is rejected or I miss the filing deadline?

If your LUT application is rejected, you must pay IGST on exports and claim the refund via the shipping bill route. Rejection typically happens only if you have been prosecuted for tax evasion exceeding Rs 2.5 crore or have an outstanding demand. If you simply forgot to file before exporting, that shipment defaults to IGST. File the LUT for future shipments immediately. It is valid for the entire financial year once accepted.

How long does it take to get an IGST refund on exports versus an ITC refund under LUT?

IGST refunds are processed automatically through the ICEGATE-GSTN link in 30 to 60 days if data matches. ITC refunds under LUT require manual filing of RFD-01 and typically take 60 to 90 days. Both routes are subject to delays from data mismatches, deficiency memos, and officer queries. Check our GST refund delays guide for tips on speeding up either process.

Related reading

GST for Exporters: Complete Guide

Registration, returns, Table 6A, and refund mechanics for goods exporters.

GST on Export of Services

Zero-rating rules, FIRC requirements, and LUT specifics for service exports.

GST Refund Delays: What to Do Next

Escalation path from officer to High Court when your IGST or ITC refund is stuck.

Update history

• 2026-08-05 First published.