👍👍👍👍👍👍👍Exporting with Tax Payment vs Bond/LUT: What’s Better?

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Exporters often find themselves at a crossroads when deciding whether to export goods with or without payment of tax. Both options are legally available, but which one is more beneficial? In this article, we delve into the financial implications of each option, with a focus on why exporting with payment of tax can be advantageous for some businesses.

The Options at Hand

Exporters have two choices:

i. Export without payment of tax under Bond or Letter of Undertaking (LUT), thereby claiming a refund only on input tax and input services.

ii. Export with payment of tax, allowing them to claim refunds on input tax, input services, as well as capital goods.

Let’s understand this process with an examples.

Suppose Mr. Kapoor of Noida, Exports Home Décor item to US.

Input Tax Credit available to him is:Item Amount

Input (Raw materials)	10,00,000
Input services (Advertisements)	2,00,000
Capital Goods (Machinery)	4,00,000
Total Credit balance	16,00,000

Suppose his Export order is of 1 Cr. Taxable @ 18%.

He has above mentioned two option to Export

Option I : Export without Payment of Tax i.e. Under Bond / LUT

At the time of Export he export goods without payments of Tax and Claim Refund of Tax paid on input & input services.

i.e.Item Amount

Outflows
His outflow (Tax Pay)	0
Inflows
His inflow (Refund)	12,00,000
Total inflow	12,00,000

Option II. With Payment of Tax i.e. Without (Bond / LUT)Item Amount

Liabilities at the Time of Export
Total Tax Payable = 1800000 (1 Cr. * 18%)	18,00,000
(-) Available Input Tax Credit	16,00,000
Liability to pay Tax in Cash	2,00,000
Refund application will be made of	18,00,000
i.e.
Net Cash Flows
His outflow	2,00,000
His inflow	18,00,000
Net inflow	16,00,000

The Comparison

By exporting with payment of tax, Mr. Kapoor benefits by ₹2,00,000 compared to exporting under Bond/LUT. The ability to claim a refund on capital goods makes the second option more financially beneficial for him.

Conclusion: Exporting with payment of tax can offer additional financial advantages compared to exporting without payment of tax under Bond/LUT, especially if the business has significant capital goods expenses. In Mr. Kapoor’s case, Option II was more beneficial by ₹2,00,000, primarily due to the eligibility to claim a refund on capital goods. Therefore, businesses must carefully assess both options to determine which would be more financially advantageous for them.