Proforma Invoice under GST: A Detailed Guide
A document created before selling goods or services is a proforma. This document is given to the buyer or customer inquiring about the products or services by the supplier or retailer. It gets issued before the issuance of a tax or business invoice. This tutorial will assist you in comprehending proforma invoices under GST, including their definition, format, and applications. As a supplier, you might wonder if the appearance of a proforma invoice has changed due to the Goods and Services Tax (GST). This article answers all questions about the proforma invoice.
Table of content
What is a Proforma Invoice?
A proforma invoice is a document that provides information on the products or services not delivered to the buyer or client. It gives an estimate of the costs of the available goods and services. It also includes the estimated cost of applicable taxes, commissions, shipment weight, shipping charges, etc. When a buyer or customer sends inquiries, a supplier or retailer sends them a proforma invoice.
Purpose of issuing Proforma invoice
To give the estimated total cost of the sale of goods or services not delivered.
To give the customer information about the items that will be shipped, their worth, the estimated delivery time, etc.
Declaring to the buyer that the supplier will deliver the described goods or services at the agreed-upon prices.
Proforma invoices are also when two businesses collaborate for the first time. The buyer is not required to pay for the specified goods or services. As a result, neither the buyer nor the supplier should record a proforma invoice as accounts payable or receivable.
Use Cases of a Proforma Invoice
Initial Sales Conversations
A proforma invoice is commonly utilized in the early stages of sales negotiations when a buyer has expressed interest but the final decision is pending. The seller provides a comprehensive cost estimate for the proposed transaction, which includes item descriptions, quantities, and prices. Before committing to the sale, this document enables both parties to discuss terms and make clear intentions.
Commitment with Awaiting Information
Proforma invoices get created when a buyer is interested in a purchase but has not yet received specific information or final confirmations. The buyer may agree on a general price and quantity but needs to specify the invoice payment terms or shipping. Maintaining transparency and ensuring that both parties fully comprehend the transaction before its formal execution are two advantages of this use case.
Foreign Exchange
Because they facilitate smooth transactions, proforma invoices are crucial in international trade. Since they declare the value of the supplied items, they are frequently necessary for customs clearance. The buyer receives a proforma invoice from the seller with comprehensive product details, shipping charges, and any applicable taxes. So, proforma invoices enable sellers to avoid shipping delays and complications abroad.
Advance Payments and Large Orders
Sellers usually utilize proforma invoices to outline the costs and conditions associated with large orders. By formally requesting an advance payment or deposit from the buyer, this document ensures that everyone is on the same page regarding the terms of the deal before proceeding. The proforma invoice facilitates a more seamless transaction process by outlining the total amount due, available payment methods, and any early payment discounts.
Arrangements for Credit and Finance
Proforma invoices may be necessary when buyers are looking for credit or financing. Before granting loans or credit lines, many financial institutions require a proforma invoice as evidence of the intended purchase. The documentation allows lenders to assess the transaction validity by explaining the goods or services purchased. By providing a proforma invoice, sellers can expedite the financing process and help buyers obtain the funds needed to finalize the purchase.
When is the Proforma invoice used?
A proforma invoice comes into existence before the sale. If a customer asks a supplier to provide a document for goods or services not delivered, the supplier will provide a proforma invoice. It gets issued before the commercial invoice or tax. The amount on the proforma invoice will match or be nearly equal to the amount on the final invoice. Proforma invoices are more frequently used on imports or exports to ensure a seamless delivery process. For instance, a two-wheeler buyer might accept the bike's price as shown on the proforma invoice. When the bike is ready, the supplier will deliver it, and the customer will pay after receiving the invoice.
Contents of Proforma Invoice
A proforma invoice contains the information listed below:
Invoice number
Date of preparation/publication
The supplier's address
The potential buyer's address
An explanation of the products or services, along with the line-item totals and unit costs
The proforma invoice's validity
The suggested terms of sale
Any suggested terms of payment
Certifications mandated by "Customs Authorities," if any;
Signature of a designated representative from the supplier's organization
Proforma Invoice Format
Proforma invoices are part of best business practices, but there are no legal requirements for their precise format. The appearance of a proforma invoice and a commercial invoice can be nearly identical. However, "proforma" should be prominently displayed, and the words "This is not a GST invoice" may also be included. Until the work is completed and the final tax invoice is issued, the proforma invoice, merely an estimate, should not be paid.
Mistakes to Avoid in Proforma Invoices
The following are typical errors to steer clear of when creating a proforma invoice:
Ignoring Crucial Information: To prevent overlooking important information, clearly include item descriptions, quantities, and prices.
Ignoring the GST Rates: To avoid mistakes, you must apply the appropriate GST rates for your products or services.
Ignoring the Terms of Payment: You must share the expected time and method of payment to prevent misunderstandings later.
Failure to Verify Validity Dates: To avoid misunderstandings mention the proforma invoice's validity period.
Ignoring Certifications: To prevent problems with clearance, include any certifications that the customs authorities require.
Ignoring the Authorised Signature: To ensure the invoice appears official and professional, have a designated individual sign it.
Ignoring the label "Not a Tax Invoice": To avoid confusion, you must clarify that this is a proforma invoice and not the final expense.
Disregarding Relevant Taxes: Indicate if GST is included in the prices to guarantee precise tax computations.
Ignoring Extra Expenses: Incorporate additional fees like shipping charges to prevent the buyer from incurring unforeseen expenses.
Steps to Make Proforma Invoice under GST
There are several steps involved in creating a proforma invoice.
Step 1: Give each invoice a distinct number and include the preparation date. You should add the buyer's and seller's names, addresses, and phone numbers.
Step 2: List the products or services offered, their costs, and their quantities. Ensure that the GST information is explicit and indicates whether or not the prices include taxes.
Step 3: Clearly state the payment terms, including the expected date and payment method. These actions guarantee both parties' understanding and openness.
Changes in Proforma invoice under GST
The format and content of proforma invoices under pre-GST and GST law are essentially the same. Apart from the following, they essentially stay the same:
Whereas the former includes a VAT, CST, or sales tax registration number, the GST proforma invoice has a GST registration number.
Furthermore, the GST proforma invoice includes extra details about SAC codes for services and HSN codes for goods.
GST classification according to whether the supply is intrastate or interstate: SGST, CGST, and IGST
Differences between Invoice, Pro-Forma Invoice, Estimates, and Purchase Order
Invoice | Pro forma invoice | Quotation/Estimates | Purchase order |
A commercial document issued by the supplier to the buyer. Includes the details of goods/ services supplied to the buyer and notifies that payment is due. | A document with information about the particulars of the goods/services yet to be delivered to the buyer. | Shows the goods/ services needed and the total amount owed. | A document issued by the buyer and sent to the supplier. Details the list of the goods/ services to make a purchase. |
Aims to notify the buyer that payment is due. | Aims to help the buyer decide whether to place an order or not. | Aims to provide estimated sale price of goods yet to be delivered. | Aims to order goods and/or services from the supplier. |
Issued before payment is received by the supplier. | Issued before goods/services are delivered to the buyer. | Issued on buyer’s request before goods /services are delivered to the buyer. | Issued after the receipt of quotation/ proforma invoice from the supplier. |
Raised by the supplier | Raised by the supplier | Raised by the supplier | Raised by the buyer |
Issued to the buyer/customer | Issued to the buyer/customer | Issued to the buyer/customer | Issued to the supplier |
Confirmation of sale on acceptance | Creation of sale on acceptance | Creation of sale on acceptance | Contract of Sale on acceptance |
Non-negotiable | Negotiable | Negotiable | Not applicable |
Conclusion
Proforma invoices are crucial instruments used in a variety of commercial contexts, giving buyers and sellers a first grasp of terms and expenses. Although a proforma invoice by itself does not incur GST, a number of circumstances, including advance payments and the conversion to a final invoice, may result in GST liability. When moving from proforma bills to final commercial invoices, it is critical for organisations to comprehend the subtleties of GST applicability and guarantee compliance with the pertinent legislation.
FAQ
Q1. Who issues the Proforma invoice to whom?
The buyer receives the proforma invoice from the supplier for the approval.
Q2. Is a proforma invoice a real invoice?
Proforma invoices are not the same as actual invoices. It merely includes the specifics of the products or services not yet delivered to the buyer or customer.
Q3. Is GST applicable on a proforma invoice?
Since a proforma invoice is not a final invoice, GST is not applicable. It does not represent a sale; it is an estimate. Nevertheless, GST will be added to the final invoice following the sale.
Q4. Is the proforma invoice a valid document?
A proforma invoice is a legitimate document for estimating expenses and providing the buyer with the terms of a possible sale. It is not regarded as a legally enforceable contract, though. Negotiations and internal approvals must be conducted using it.
Q5. Is the proforma invoice negotiable?
Yes, the proforma invoice is negotiable. A buyer can haggle over several issues, including cost, delivery schedule, and price.
Q6. Can the proforma invoice be cancelled?
Indeed, you can cancel a proforma invoice whenever you want before the sale gets finalized. It is necessary to notify the buyer of the cancellation. For clarification, it is best to send out a cancellation notice.
Q7. Is a proforma invoice legally binding?
A proforma invoice does not have legal force behind it. The buyer is not required to pay; it merely acts as an outline for an estimate. After the sale, a standard invoice has legal weight.
Q8. Can we use a proforma invoice to get advance payments?
You can request upfront payments from the buyer using a proforma invoice. It gives the buyer a foundation for depositing by outlining the anticipated expenses and conditions. Clear payment terms must be included in the document, though.
Q9. What is the methodology for revising proforma invoices?
The seller has the right to change the terms of the previously issued proforma invoice, including the price. Therefore, whenever the contents of a proforma invoice change, the invoice number must be updated to stay on course.
Q10 What are the reasons to amend the details of the proforma invoice?
The proforma invoice's details may change for several reasons. Here are a few of them:
The buyer might request a discount if they think the prices are too high.
Depending on local demand, the buyer may alter the quantity.
In some cases, if the supplier's delivery date is unacceptable, the buyer may request a closer shipment date.
If the buyer requests an urgent delivery, the transportation mode changes. For instance, switching from sea to air transportation is an option.
Q11. Can a proforma invoice be accounted for in the books?
A proforma bill isn't a genuine one. Consequently, there is no record of the financial transaction in the books of accounts.
Q12. What is the validity period of a proforma invoice?
The validity of a proforma invoice differs depending on the industry and the company. The proforma invoice specifies the validity.
Q13. Which are the principal industries where the proforma invoice is used?
Proforma invoices are frequently used by companies in many sectors, including manufacturing, import/export, trading, wholesale, and dealerships, to expedite internal purchasing approval procedures.
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