GST, LUT & IT Exports: What Every Surat Founder Needs to Know

If you are a Surat IT company exporting services to international clients, understanding GST and FEMA compliance is not optional — it is the difference between legally retaining your foreign earnings and facing penalties, interest, and possible prosecution. The good news is that the Indian tax framework for IT service exports is genuinely favorable. The bad news is that the benefits are only available to companies that follow the procedures correctly. This guide covers what every Surat founder needs to know, with accurate information about Indian tax law as it currently applies to software and IT service exporters.

The Zero-Rated Status of IT Service Exports

The most important concept to understand: IT service exports are zero-rated under the Integrated Goods and Services Tax (IGST) Act, 2017. Zero-rated means the output — your invoice to the international client — attracts 0% GST. You do not charge GST to your foreign clients, and you do not pay GST on the revenue they pay you.

However, zero-rated is emphatically not the same as exempt. This distinction is critical and frequently misunderstood by founders operating without specialist CA advice:

• Exempt supplies — no GST on output, and no credit for GST paid on inputs (your vendors, software subscriptions, office expenses, etc.)
• Zero-rated supplies — no GST on output, but full credit for GST paid on inputs, which can be claimed as a refund from the government

For an IT company that pays 18% GST on cloud computing costs, software licenses, equipment, and professional services, the ability to claim Input Tax Credit refunds on those inputs is a meaningful cash flow benefit. A company spending ₹20 lakh per year on GST-eligible inputs can claim ₹3.6 lakh back annually — money that is legally yours to recover, but only if you follow the correct export procedures. To qualify as an export of services under GST law, four conditions must be met: the supplier is in India, the recipient is outside India, the payment is received in convertible foreign exchange, and the supplier and recipient are not merely establishments of the same entity.

Letter of Undertaking (LUT): File Before You Export

The Letter of Undertaking (LUT) is the single most important procedural step for any IT company exporting services. Without a valid LUT, you are required to pay 18% IGST on every export invoice at the time of invoicing, then apply for a refund after the fact. This creates a substantial working capital problem — you are effectively lending the government 18% of your export revenue for the duration of the refund process, which can take several months. With a valid LUT, you export without paying IGST upfront. Key facts about LUT filing every Surat IT founder must know:

• Annual filing requirement — LUT must be filed at the beginning of each financial year (April 1 onwards), before you export any services in that year. An LUT filed on April 5 covers exports from that date through March 31 of the following year. There is no grace period: exports made before the LUT is filed in a new financial year are technically non-compliant.
• How to file — LUT is filed online on the GST portal (gst.gov.in) under Services → Returns → LUT. For most IT companies with no prosecution history and no major outstanding tax demands, the filing takes 15–20 minutes and is self-approved instantly.
• Eligibility — Any GST-registered exporter can file an LUT unless they have been prosecuted for tax evasion exceeding ₹2.5 crore in a previous year.
• Reference on invoices — Every export invoice issued under LUT must mention the LUT reference number, the phrase "Supply meant for Export under LUT without payment of IGST," and your GSTIN. Missing these details can complicate refund claims.

Input Tax Credit Refunds on Exports

Because IT service exports are zero-rated, the GST you have paid to your vendors — on cloud hosting, software subscriptions, equipment, office rent, professional services, and other GST-eligible business expenses — is recoverable as a refund from the government. For a company spending ₹50 lakh per year on GST-attracting inputs, the annual ITC refund entitlement is ₹9 lakh. The refund claim process has several procedural requirements:

• GSTR-1 and GSTR-3B must be filed and reconciled — your export invoices must be correctly reported in GSTR-1 as zero-rated supplies. Any mismatch between GSTR-1 and GSTR-3B will hold up refund processing.
• Refund application via RFD-01 — filed on the GST portal, typically on a monthly or quarterly basis. You can claim the refund of ITC accumulated specifically because of zero-rated exports.
• Documentary requirements — the refund application requires a statement of invoices, proof that payment has been received in foreign exchange (Bank Realisation Certificate or FIRC), and where applicable, proof that services were delivered to an overseas recipient.
• Limitation period — you have two years from the date of export to claim ITC refunds. Refund claims filed after two years are time-barred. Several Surat IT companies have permanently lost refund entitlements due to this deadline. Put refund filing on a quarterly calendar reminder — it is not something to batch annually.

Bank Realization Certificate and FEMA Compliance

Every foreign payment received by your company triggers obligations under two regulatory frameworks: GST (for ITC refund claims) and FEMA (the Foreign Exchange Management Act, which governs receipt of foreign currency into India). When a foreign client wires payment to your Indian bank account, your bank issues one of two documents:

• FIRC (Foreign Inward Remittance Certificate) — issued by most private and public sector banks for foreign currency receipts. This is the standard document proving foreign exchange receipt.
• BRC (Bank Realisation Certificate) — issued specifically for export transactions and is the document required for GST ITC refund applications. Some banks issue BRC directly; others issue FIRC and you obtain BRC separately through the EDPMS portal.

Keep every FIRC and BRC. These documents prove that foreign exchange was received in India in compliance with RBI regulations. You will need them for GST refund applications, income tax assessments, and any bank or investor due diligence.

FEMA compliance for IT service exporters has one critical timing requirement: payment from the overseas client must be received within 15 months of the invoice date. This is the statutory deadline for realization of export proceeds for service exports under the Foreign Exchange Management (Export of Goods and Services) Regulations. If a client invoice remains unpaid beyond 15 months, you are required to report it to your Authorized Dealer bank and may need to seek RBI approval for the delay. Do not let outstanding international invoices age without active follow-up — beyond the cash flow impact, there is a regulatory compliance dimension that most founders only discover when it is already a problem.

Common GST Mistakes IT Companies Make

In conversations with SIC members and their CAs, a consistent pattern of compliance errors emerges. These mistakes are avoidable, but each has real financial consequences — from delayed refunds to outright penalties and permanently lost entitlements.

• Missing LUT before the financial year starts — the most common and costly mistake. An IT company that begins April invoicing before filing LUT has technically exported without LUT, making those invoices non-compliant. Set a calendar reminder for the last week of March every year.
• Incorrect invoice format for exports — export invoices must specifically state: "Supply meant for Export under LUT without payment of IGST," your GSTIN, the LUT reference number, the country of origin, and the foreign currency amount. Invoices that look like domestic invoices create refund processing complications and audit flags.
• Receiving payments in personal accounts — foreign client payments received in the founder's personal bank account rather than the company's current account are not recognized as legitimate export proceeds under FEMA. The FIRC or BRC will not be issued correctly, ITC refunds cannot be claimed, and the income creates personal tax complications. All foreign client payments must come into the registered company's bank account.
• Treating zero-rated as exempt in GST returns — export supplies must be reported under the correct GSTR-1 tables as zero-rated, not as exempt. This error directly prevents ITC refund processing.
• Missing the two-year ITC refund deadline — the limitation period is strict and non-extendable. Money left on the table is permanently lost.
• No written contracts with foreign clients — FEMA compliance and refund claim defense is significantly easier when a written service agreement documents the nature, scope, and payment terms of the engagement.

TDS on Foreign Payments

Tax Deducted at Source (TDS) is a common area of confusion for IT companies that make payments both to domestic vendors and to foreign parties. The TDS framework differs significantly for each, and applying domestic rules to foreign payments — or vice versa — creates serious compliance problems.

TDS on domestic vendor and contractor payments is governed by Sections 194C and 194J of the Income Tax Act:

• Section 194C — applies to payments for work contracts including software development and IT projects. TDS at 1% for individuals and HUFs, 2% for companies and firms, if a single payment exceeds ₹30,000 or aggregate payments in a financial year exceed ₹1 lakh.
• Section 194J — applies to fees for professional and technical services. TDS at 2% for technical services and 10% for professional services. Threshold: single payment above ₹30,000.

If your IT company pays freelancers or subcontractors above these thresholds without deducting TDS, those payments may be disallowed as business expenses during income tax assessment — meaning you pay both the penalty for non-compliance and lose the tax deduction on the payment itself.

TDS on payments to foreign parties is governed by Section 195 of the Income Tax Act. If you make payments to foreign vendors — offshore contractors, overseas software licenses, foreign consultants — TDS at the applicable rate (typically 20–25% or the lower treaty rate under a relevant DTAA) must be deducted and deposited with the government. Failure to deduct under Section 195 results in the payment being disallowed as a deduction and creates significant personal liability for the person responsible for making the payment. This is an area where specialist CA advice is essential before you make your first foreign vendor payment.

Getting the Right CA

The most practical advice in this entire guide: engage a CA who specifically handles IT export companies, not a generalist practice. The intersection of GST zero-rating, LUT filing, FEMA compliance, ITC refunds, Section 195, DTAA implications, and transfer pricing for IT exporters is a specialized knowledge set. A generalist CA who is not current on these regulations will give you compliant advice in the areas they know and miss the areas they do not.

The characteristics of the right CA for an IT export company:

• They file LUTs for multiple IT clients every April as routine work — not "they know how to do it," but they do it consistently every year
• They are familiar with the EDPMS system and BRC/FIRC documentation requirements for export proceeds
• They have handled ITC refund applications specifically for service exporters, not just goods exporters — the processes differ in important ways
• They proactively calendar advance tax installments, LUT renewal, and refund deadlines for their clients — not just respond when asked
• They can advise on Section 195 and DTAA implications if your company makes payments to foreign parties

Several SIC member companies have made referrals to CA firms with demonstrable IT export specialization through the community network. The referral channel within SIC is the most reliable way to find these practitioners — the member companies have already done the due diligence of working with them through audits, refund claims, and compliance reviews. If you are currently working with a CA who is not proactively flagging LUT renewal deadlines and ITC refund opportunities, that is a signal worth acting on. The cost of a compliance error in this area — penalties, interest, disallowed deductions, refund forfeitures — significantly exceeds the cost of specialist advice. Reach out through the SIC community for referrals.