Importance Of Pro Forma Invoice In GST Accounting
If you are a novice entrepreneur or an accountant, not knowing what invoice to use in a given situation then don’t worry, it’s normal. You will know everything with time. Being in a business, one has to deal with a variety of invoices, each having its own purpose. One such invoice is a Pro Forma invoice, in this blog, we will discuss the importance of Pro Forma invoices in GST accounting. So let’s get started.
What Is Pro Forma Invoice?
Let’s start with the basics. The word ‘Pro Forma’ means ‘for the sake of form’ or ‘as a matter of form’. As the meaning implies it is just for the purpose of formality. In other words, it is a document under GST that a supplier facilitates to a prospective buyer as a response to an inquiry raised by a buyer. It furnishes details of products, estimated price and the time of delivery, delivery cost, and other additional details along with terms of sales and terms of payment.
Thus, this document sets up the ground for negotiation so that both parties can discuss in detail and close the deal with utmost transparency. As we mentioned earlier that it is just for the sake of formality, thus buyers are not supposed to make payment against such an invoice.
When To Use Pro Forma Invoice? – Purpose
The following are the purposes of the Proforma Invoice:
- To provide information on cross-border transactions such as currency, exchange rate, interest, and credit options
- To furnish contact details so that customers can contact
- Acts as a replica of the sales invoice
- Provide shipping and other additional charges
- Clarifies terms and conditions in advance
- Act as a confirmation that the supplier is committed to providing goods/services at the said price
- Furnishes details of taxes and customs duties
Details To Mention On Pro Forma Invoice Under GST Accounting
To comply with GST accounting regulations, your Proforma invoice must have the following information:
- Unique invoice number
- Address of the supplier
- Address of the prospective buyer
- Date of issue
- Description of goods or services, along with their unit costs and item totals
- HSN / SAC codes
- SGST/CGST/IGST tax rates
- Validity of the pro forma invoice
- Proposed terms of sale
- Proposed terms of payment, if any
- Certificates Provided to Customs Authorities
- Signature of supplier
Also Read: What is the difference between pro forma invoice and tax invoice
What Are The Different Terms And Conditions That Can Be Mentioned On A Pro Forma Invoice?
Following is the list of terms and conditions that you can mention on a proforma invoice:
- Transaction
- Payment terms
- After-sale services
- Guarantee or warranty, if any
- Installation terms
- Delivery terms
- Returns terms
Things To Know About Pro Forma Invoice
Following is the list of important details that you should know about the Proforma invoice:
- It does not guarantee the sale
- Consumers are not supposed to make payments based on this type of invoice
- It will be considered a reference document for any obligations or benefits provided by the company
- The actual payment amount may or may not vary
- This form of invoice cannot be a substitute for a tax invoice
Benefits Of Using Pro Forma Invoice
Here are the advantages an organization has if they use Pro Forma Invoices:
- Proforma invoices clarify the price and all the other terms and conditions associated with the transaction before the actual transaction takes place
- Apart from domestic transactions, this invoice is widely adopted in exports. The supplier is responsible for drafting the invoice along with product pricing and currency exchange rate
- This invoice may also use as a proof of document if products are samples, not intended for selling
- Based on the information received from the Proforma invoice, buyers can easily make a decision pertaining to order placement
Changes In Pro Forma Invoice Post GST Implementation
GST, a new tax regime overhauled the indirect tax system in India. As a result, the format of the Proforma invoice also changed. Following are the updates introduced in the format of Proforma invoice post GST implementation:
- Proforma invoice under GST contains GST registration number. Earlier it used to contain VAT/CST/Sales Tax registration numbers
- One new field is added to the same post GST roll-out, which HSN codes of goods and SAC codes of service
- The tax amount is classified under categories such as SGST, CGST, and IGST
Difference Between Pro Forma Invoice, Tax Invoice, Quotations & Purchase Order
Following is the difference between proforma invoices, tax invoices, quotations & purchase orders:
Particulars | Pro Forma Invoice | Tax Invoice | Quotations | Purchase Order |
Definition | A document containing particulars of goods or services, their price, and terms of sale along with terms of payment. | A commercial document specifies a list of goods or services that are supplied and also expresses that the payment is due. | A document that declares a formal estimated price of goods or services that you want to buy. | A document containing a list of goods or services you want to buy. |
Purpose | To clarify the price of goods/services and other terms & conditions | To remind the customer about the payment | To inform the estimated sales price of goods/services | To place an order with the supplier |
When to issue? | Before the delivery of goods/services | When the order is confirmed | After receiving a quotation from the seller’s end | After receiving quotation from the seller’s end |
Issued by | Seller | Seller | Seller | Buyer |
Issued to | Customer | Customer | Customer | Supplier/dealer |
Confirmation leads to | Creation of sale | Validation of sale | Creation of sale | Contract of Sale |
Negotiability | It is Non-Negotiable | It is Negotiable | It is Negotiable | N/A |
Over To You
So it was all about the importance of proforma invoices under GST accounting. We hope after reading this blog you are very well acquainted with a proforma invoice and its uses. In case you are looking for GST accounting software, you must try Munim. For more information, feel free to contact us.