Choosing Between LUT and IGST Route – A Cash-Flow, Compliance & Risk-Based Framework
By CA Surekha S. Ahuja
As FY 2025–26 draws to a close, exporters are required to take an important forward-looking decision for FY 2026–27:
whether exports should be made under LUT without payment of IGST, or with payment of IGST followed by refund.
This choice is often misunderstood as a technical or procedural issue. In reality, it is a strategic decision with direct implications on working capital, compliance certainty, and operational ease. The law permits both routes. The business outcome, however, differs materially depending on the exporter’s profile.
This guidance note distils experience from practical GST administration, audits, and refund behaviour to help exporters make the right choice upfront, rather than correcting it later at the cost of blocked cash and avoidable litigation.
The Foundational Principle That Must Anchor the Decision
Exports are zero-rated supplies under Section 16 of the IGST Act. GST, by design, is not intended to become a cost, nor a financing burden, for exporters.
Both the LUT route and the IGST-payment route are legally valid. The distinction between them lies only in the timing and movement of funds, not in tax incidence. Any strategy that converts GST into a long-standing receivable on the balance sheet defeats the very purpose of zero-rating.
What Actually Changes Between LUT and IGST Routes
Under the LUT mechanism, exports are made without payment of IGST and the exporter claims refund of accumulated input tax credit. This results in no upfront tax outflow and a relatively stable working capital position.
Under the IGST route, tax is paid at the time of export and recovered later by way of refund. While this may appear neutral on paper, in practice it introduces temporary but significant cash blockage, dependence on automated systems, and exposure to refund mismatches.
The difference is not theoretical—it is felt directly in liquidity, especially for exporters with regular volumes.
Services vs Goods: Where the Strategic Line Is Clear
For exporters of services, the answer is largely settled. The LUT route should be treated as the default option.
Service exports do not benefit from shipping-bill-based automated refunds. Refunds under the IGST route for services involve higher scrutiny, slower processing, and avoidable blockage of funds. Paying IGST upfront in such cases offers no commercial advantage and often complicates reconciliation.
The IGST route for service exporters should therefore be confined to rare, exceptional transactions, not adopted as a routine method.
For exporters of goods, the decision requires nuance. Where exports are regular or continuous, LUT remains the superior option due to better cash flow discipline. The IGST route may be considered where exports are occasional or one-time, and the exporter has surplus liquidity and a clean refund track record. The ICEGATE automation system works best in low-volume, clean-data scenarios—not in repetitive, high-frequency exports.
Domestic and Export Supplies Together: The Most Misjudged Area
Businesses supplying both domestically and internationally often make the mistake of selecting an export route without analysing their ITC absorption capacity.
The decisive question is simple:
Is the input tax credit naturally absorbed against domestic output GST?
Where the answer is negative or only partially positive, adopting the IGST route leads to a double working capital blockage—first by utilising ITC to pay IGST on exports, and then by waiting for its refund. In such cases, LUT is not merely preferable; it is strategically essential.
Only where domestic supplies fully and consistently absorb ITC, and exports are infrequent, can the IGST route be selectively considered without stress.
Why Export Ratios Alone Are Misleading
Export percentage is often over-emphasised. In practice, regularity of exports matters more than their proportion.
Continuous monthly exports—even at moderate ratios—are better handled under LUT. Any export of services, irrespective of volume, tilts strongly in favour of LUT. IGST payment is best reserved for isolated, non-recurring export transactions.
ITC Accumulation: The Hidden Driver of the Decision
Accumulation of ITC is not an anomaly; it is a structural feature of many export businesses, especially those that are labour-intensive, input-heavy, or engaged predominantly in zero-rated supplies.
It is important to clarify that ITC on GST-paid labour services is generally admissible, provided the services are used in furtherance of business and are not hit by specific restrictions under Section 17(5). Consequently, labour-heavy exporters will almost inevitably accumulate ITC.
For such businesses, opting for the IGST route converts GST into a financing cost. LUT, on the other hand, aligns naturally with their credit profile and preserves liquidity.
Switching Between LUT and IGST: Legal but Strategically Unsound
The law does not prohibit switching between the two routes. However, frequent switching introduces operational friction—refund mismatches, portal inconsistencies, audit flags, and unpredictability in cash flow.
A disciplined approach is to select one principal route for the financial year, aligned with the business model, and deviate only for exceptional shipments where commercial reasons clearly justify it.
Foreign Exchange Fluctuation: No GST Consequence
Foreign exchange gains or losses arising on realization of export proceeds do not constitute a separate supply. They do not alter GST liability and do not affect refund eligibility. This position applies uniformly to exports, deemed exports, and direct port shipments.
GST valuation is fixed at the time of supply. Subsequent realization differences remain an accounting matter, not a GST event.
Strategic Takeaway for FY 2026–27
Based on FY 2025–26 behavior, exporters should default to the LUT route where exports are recurring, services are involved, ITC accumulates, or working capital sensitivity is high. The IGST route should be reserved for rare, low-frequency exports where liquidity is strong and refund certainty is demonstrably high.
Final Perspective
GST is intended to circulate within the business ecosystem, not sit idle as a refund claim.
When GST consistently appears as a receivable in the balance sheet, it is not a compliance success—it is a strategic warning.
The export route decision, if taken correctly at the beginning of FY 2026–27, can quietly save months of cash blockage and years of avoidable follow-up.
