Execution of Bank Guarantee/Letter of Undertaking: An Overview

The execution of a Bank Guarantee (BG) or Letter of Undertaking (LUT) is a critical process in the realm of international trade, particularly when dealing with export promotion schemes under the Foreign Trade Policy (FTP) of India.

The key schemes where these instruments are required include the Advance Authorization (AA), Duty-Free Import Authorization (DFIA), and Export Promotion Capital Goods (EPCG) schemes.

This blog provides an overview of the norms and procedures governing the execution of BG and LUT, drawing from various circulars and policy documents.

Understanding Bank Guarantee and Letter of Undertaking

A Bank Guarantee is a legal instrument issued by a bank on behalf of the exporter, assuring the Customs authorities that the stipulated export obligations will be fulfilled.

The amount of Bank Guarantee shall be equal to the customs duty benefit availed by the exporter which would be enforced along with interest @ 15% per annum in the event of default by the exporter. A Letter of Undertaking, on the other hand, is a commitment by the exporter to comply with the requirements of the Customs authorities without the need for a monetary guarantee.

The eligibility criteria to avail the option of letter of undertaking instead of furnishing Bank Guarantee is provided in the relevant Customs Circular as explained in following paragraphs.

Key Policy Frameworks

1. Circular No. 58/2004-Cus dated 21.10.2004:

This circular laid down the initial norms for the execution of bonds and bank guarantees under the Advance License and EPCG schemes. It introduced exemptions for certain categories of exporters based on their export performance and past record of duty payments. Exporters with a turnover of ₹5 crores or more and a good track record of three years of export were exempted from furnishing a BG and allowed to submit a LUT instead​.

1. Modifications of Circular No. 58/2004 dated 21.10.2004 through Circular No. 17/2009-Cus dated 25.05.2009:

This circular extended the benefits of BG exemptions to service providers, aligning them with physical exporters under certain conditions. Circular No. 17/2009 dated 25.05.2009 also allowed the benefit of Circular no. 58/2004 to imports under DFIA Scheme. It also introduced provisions for considering the cumulative turnover of all units under a single Importer Exporter Code (IEC) for determining BG exemption eligibility.

1. Revisions made vide Circular No. 31/2019-Cus dated 13.09.2019:

With the advent of the Goods and Services Tax (GST), the norms for BG execution were revised. The exemption criteria were updated to include manufacturer exporters or service providers registered with GST authorities who had significant export performance or had paid substantial GST during the preceding financial year​.

Eligibility and Conditions for Exemption

Exporters and importers can avail exemptions from furnishing a BG under certain conditions:

1. High Export Turnover and Good Track Record: All Exporters with a physical export turnover of ₹5 crores or more in the current or preceding financial year and good track record of three years of exports

2. Public Sector Undertakings and Star Export Houses: These entities are exempt from furnishing Bank Guarantee.

3. Significant Export Performance - Manufacturer Exporter or Service Providers registered with GST Authorities who has exports during the previous two financial years and minimum export of Rs. 1 crore or more during the preceding financial year

4. Substantial Amount of Payment of GST - Manufacturer exporters/Service Providers registered with the GST authorities who have paid GST of Rs.1 crore or more during the preceding financial year

All exporters falling in the above categories are exempted from furnishing the Bank Guarantee. However, quantum of Bank Guarantee for the exporters who are not covered in the above categories are as under –

Category of Importer	Quantum of Bank Guarantee/cash security
Manufacturer exporters who are not covered under the above categories Units in Agri Export Zones (AEZs), Established Service Providers who have free foreign Exchange earnings of Rs.50 lakhs or more during the preceding financial  year and have a clean track record.	15%
Service providers in the port handling sector who are appointed as  Custodians by the  jurisdictional Customs / Central Excise authorities	25%
Others	100%

Execution Process

1. Submission of Documents: For availing the exemption from furnishing Bank Guarantee, exporters must submit proof of export performance or duty payments.

In case the authorisation holder is a registered member of an Export Promotion Council, he shall produce a certificate of export performance or payment of duty/GST for the from the concerned Export Promotion Council.

In cases where the authorisation holder is not a registered member of an Export Promotion Council, he may produce such certificate duly authenticated by a practicing Chartered Accountant who is registered with the GST Department for payment of GST

1. Filing of LUT/Bond: In cases where BG is not required, an LUT or bond must be filed. This document serves as a legal commitment to fulfil export obligations and comply with all terms of the license.

2. Maintenance and Monitoring: Customs Authorities are responsible for maintaining registers of bonds and BGs and ensuring timely renewal or enforcement if obligations are not met.

3. Special Provisions for Corporate Guarantees: In some cases, a corporate guarantee can be filed by a parent company on behalf of its subsidiary, provided the parent company holds a significant stake in the subsidiary.

Conclusion

The execution of a Bank Guarantee or Letter of Undertaking is a crucial compliance aspect in international trade, particularly under India's export promotion schemes. The policies governing this process have evolved over time to accommodate changes in the economic environment, such as the introduction of GST. Exporters and importers must stay informed of the latest norms to ensure smooth operations and compliance with Customs requirements. Understanding these requirements not only facilitates smoother trade transactions but also helps in leveraging the exemptions and benefits provided under the Foreign Trade Policy.

This overview is based on a detailed review of relevant circulars and policy documents, including Circular Nos. 58/2004, 17/2009, and 31/2019, as well as the Foreign Trade Policy 2023.