Buyer Guides · 7 MIN
India GST and the Letter of Undertaking (LUT) for exporting software services
How an Indian software vendor invoices a foreign client without charging GST: export of services conditions, the LUT (Form GST RFD-11), the one-year rule, and proof of payment.
An Indian software vendor can invoice a foreign client without charging GST if the supply qualifies as an export of services and the vendor has filed a Letter of Undertaking (LUT) in Form GST RFD-11 for the financial year. The supply is zero-rated, so the client pays no Indian GST, and the vendor can still claim refund of input tax credit.
- Export of services under the IGST Act has five conditions, including payment in convertible foreign exchange and a recipient located outside India.
- Exports are zero-rated, which means a rate of 0 percent with input tax credit refundable, not exempt.
- A vendor can export under a LUT without paying IGST, instead of paying IGST and claiming a refund.
- The LUT is filed on the GST portal each financial year, before the first export of that year.
- If payment does not arrive within the period Rule 96A allows, broadly one year from the invoice date, the vendor must pay the IGST with interest, so late payers create tax cost for the vendor.
- Nactore is an AI-native technology and growth company in Mumbai that invoices overseas clients as exports under LUT, scoped to each client and country.
What counts as an export of services under GST?
Section 2(6) of the Integrated Goods and Services Tax (IGST) Act, 2017 defines export of services. All five conditions must be met.
- Supplier in India. The vendor's location is in India.
- Recipient outside India. The client's location is outside India.
- Place of supply outside India. Where the supplier or recipient is outside India, Section 13(2) of the IGST Act makes the location of the recipient the default place of supply, subject to listed exceptions.
- Payment in convertible foreign exchange. Or in Indian rupees where the Reserve Bank of India permits it.
- Not merely establishments of a distinct person. Supplier and recipient must not be the same legal entity with branches in two countries.
If any condition fails, the supply is not an export, and GST applies at the applicable rate. Read Section 2 of the IGST Act on CBIC's tax information portal.
What does zero-rated mean and why does it matter?
Under Section 16 of the IGST Act, exports are zero-rated. That is different from exempt. A zero-rated supplier charges no tax to the customer and can still recover the GST it paid on its own inputs, such as rent, software tools and subcontractors. An exempt supplier cannot recover that credit.
There are two ways to export.
| Route | How it works | Cash flow |
|---|---|---|
| Export under LUT | No IGST charged. Vendor claims refund of unutilized input tax credit. | Better, since no tax is paid up front. |
| Export with payment of IGST | Vendor charges and pays IGST, then claims a refund of it. | Worse, because the tax is stuck until refunded. |
Most service exporters choose the LUT route. A foreign client should ask a vendor which route it uses, since a vendor on the second route may price the cost of locked-up cash into its rates.
How does the vendor file a LUT?
The LUT is a declaration made on the GST portal using Form GST RFD-11, furnished before export under Rule 96A of the CGST Rules, 2017. The GST portal's user guide for furnishing a LUT shows the steps, which are short.
- Log in to the GST portal as the registered taxpayer.
- Open Services, then User Services, then Furnish Letter of Undertaking (LUT).
- Fill in the financial year, and sign with the authorized signatory using DSC or EVC.
- Download the acknowledgement and note the LUT reference number.
- Quote the LUT details on export invoices and keep the acknowledgement on file.
CBIC's circular on LUTs and bonds says a LUT is valid for the whole financial year in which it is furnished, so renew it before the first export of each new year. The same circular excludes exporters prosecuted under GST law where the tax evaded exceeds 250 lakh rupees, and they must give a bond instead. Check the current conditions with your accountant.
What should the invoice show?
A compliant export invoice includes the normal GST invoice fields plus clear export details. Ask your vendor to include the following.
- Legal name, address and GSTIN of the vendor.
- Name and address of the foreign client, in their country.
- The description of the service and SAC code.
- A declaration that the supply is an export under LUT without payment of IGST, with the LUT reference.
- The invoice amount in the agreed foreign currency, with the exchange rate basis if shown in rupees.
A foreign client should see no Indian GST line. If you do see 18 percent GST on an invoice for an overseas service, ask why. It may mean the vendor has no LUT, or that it regards the supply as domestic.
What is the one-year payment rule?
Rule 96A of the CGST Rules sets the GST consequence. If payment for exported services is not received in convertible foreign exchange (or in rupees where the RBI permits) within fifteen days after one year from the invoice date, or the longer period allowed under foreign exchange law, or a further period the Commissioner allows, the vendor must pay the tax due with interest under section 50(1) of the CGST Act.
This matters to foreign buyers. A client that pays very late, or disputes invoices for many months, creates a tax problem for the vendor. Vendors respond by asking for advance payment or shorter terms. Pay on agreed terms and tell your vendor early if a payment will slip.
How does the vendor prove it received foreign exchange?
The vendor needs bank evidence that the payment came in as foreign currency and was credited by an authorized dealer bank. This is normally the inward remittance advice that the bank issues, called an e-FIRA or a foreign inward remittance certificate. The bank records a purpose code for the inflow. The Reserve Bank of India's purpose code list describes P0802 as "Software implementation/consultancy (other than those covered in SOFTEX form)". See the RBI list of purpose codes.
Foreign clients can help by writing the vendor's invoice number in the transfer reference, and by paying from the company's own account, not a third party's. Third-party payments complicate the proof. Our guide to paying an Indian software vendor from abroad walks through the payment side.
Put "payment from the client's own account, in the invoice currency, quoting the invoice number" into the contract. It prevents most export-proof problems later.
What does this mean for your own taxes abroad?
Zero-rated in India does not mean tax-free in your country. A UK or EU business buying business services from outside the bloc typically self-accounts for VAT under the reverse charge. A UAE business may need to account for VAT under its own reverse-charge rules. A US business typically asks a foreign vendor for Form W-8BEN-E, which documents the vendor's foreign status. See W-8BEN-E when paying foreign software vendors. Local rules differ, so confirm with an accountant in your country.
Frequently asked questions
Does a foreign client pay GST to an Indian vendor?
Not on a qualifying export of services under LUT. If the supply fails the export conditions, GST at the applicable rate is charged.
Does the vendor need a GST registration to use a LUT?
Yes. Rule 96A applies to a registered person, and the LUT is filed on the GST portal. Registration rules depend on turnover and the type of supply, so a small vendor should check with its accountant.
Can an Indian company export services to its own foreign subsidiary?
Yes, if the subsidiary is a separate legal entity. If it is only a branch of the same entity, it fails the fifth condition.
Is this legal advice?
No. It is a plain summary of the law. Confirm your position with a chartered accountant or GST practitioner.
Ask about it before you sign
A vendor that understands LUT, e-FIRA and the one-year rule can invoice you cleanly. Ask for the invoice format and the payment instructions in the proposal.
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