The Freelancer Who Paid 18% GST on Foreign Clients: The LUT That Turns Service Exports Zero-Rated

"My client is in the US, so why is my CA asking me to file something called an LUT?" This is one of the most common questions freelancers and small IT service exporters ask. And the reason it matters is simple: without it, you may end up blocking your cash by paying 18% GST on income that should legally be zero-rated.

Let us clear this up properly.

Why Service Exports Are "Zero-Rated"

Under Section 16 of the IGST Act, the export of goods or services is treated as a zero-rated supply. This is different from an exempt supply. Zero-rated means the supply is taxable, but the effective rate is nil, and you still keep your input tax credit (ITC).

For a service to qualify as an export of service, it must generally meet these conditions: the supplier is in India, the recipient is outside India, the place of supply is outside India, payment is received in convertible foreign exchange (or in Indian rupees where the RBI permits), and the supplier and recipient are not merely establishments of the same person.

When these are met, you have two options:

1. Export with payment of IGST and then claim a refund of the tax paid, or
2. Export under a Letter of Undertaking (LUT) without paying any IGST at all.

For most freelancers and SMBs, the second route is far better because it avoids locking up working capital.

What an LUT Actually Is

A Letter of Undertaking is a declaration you file on the GST portal (Form GST RFD-11) promising that you will fulfil all export conditions. Once accepted, you can raise export invoices without charging GST for that entire financial year. The LUT is valid for one financial year and must be filed afresh at the start of each year.

Practical Tips to Get This Right

1. File your LUT before the financial year begins. Do not wait for your first foreign invoice. If you export before filing, that period may not be covered, forcing you to pay IGST and claim it back later. File it in April itself.

2. Mark export invoices correctly. Your invoice should clearly state "Supply meant for export under LUT without payment of IGST" and mention your LUT reference. Charge zero tax, but do report these figures in Table 6A of GSTR-1 and as zero-rated supplies in GSTR-3B.

3. Keep your FIRC or bank realisation proof. Payment in foreign currency is a core condition. Maintain Foreign Inward Remittance Certificates or bank advices linking each remittance to your invoices. This is your defence during any scrutiny.

4. Do not let your ITC lapse. Because exports are zero-rated, you can claim a refund of unutilised ITC under Section 54 using Form RFD-01. If you buy laptops, software subscriptions or pay rent for your office, that GST is refundable.

A Common FAQ

"I earn under Rs 20 lakh a year from foreign clients. Do I even need GST registration?" Export of services is treated as inter-state supply. While the basic threshold exemption can apply, once you cross the threshold or wish to claim ITC refunds, registration becomes necessary. Many exporters register voluntarily precisely so they can file an LUT and claim refunds. Assess your turnover and refund plans before deciding.

What You Should NOT Do

Do not charge 18% GST to your overseas client thinking it is "safe". A foreign recipient cannot claim Indian ITC, so you either eat the cost or lose the deal. Do not treat export income as exempt and skip reporting it, either, that invites mismatch notices. And never assume last year's LUT still works this year; an expired LUT means your exports temporarily lose zero-rated protection.

Take Action Today

If you invoice clients abroad, check whether your LUT for the current financial year is filed and accepted. Confirm your invoices carry the correct declaration, and start collecting your foreign remittance proofs in one folder. If you are sitting on accumulated ITC, speak to your CA about filing a refund claim. A few minutes of housekeeping now can save you months of blocked cash later.