Pro Forma Invoice Vs. Tax Invoice: Key Differences

In a Survey conducted by Atradius, almost 55% of companies responded that they delayed payments to their own B2B suppliers. The stat highlights the issue of delayed payments is prominent in the industry. To prevent further delays, you need to ensure that you have sent the right kind of invoice to the client. Pro Forma invoices and Tax invoices are the two major types of invoices that are widely used but they are vastly different from each other in terms of application. 

In this blog, we will know the difference between Pro Forma invoices and Tax invoices in detail along with their application. 

What is a Pro Forma Invoice? 

A Pro Forma invoice is a lead-in document sent to the consumer before the delivery of the goods. It outlines the details of the transaction, along with the type of goods, quantity of goods and other important details. 

This document only conveys the information related to the transaction, ensuring that the buyer has no objection to pricing and other charges involved in the transaction. Unlike tax invoices, it does not demand payment. 

This document is often used in the documentation of international trades, and also in securing funding from lenders. 

Advantages of Pro Forma Invoice

Following are the advantages of Pro Forma invoice that you should be aware of: 

• Provides a clear understanding of the costing 
• Helps in financial planning 
• Can be used in taking necessary approvals 
• Aids in maintaining smoother communication 

Limitations of Pro Forma Invoice

Following are the limitations of the Pro Forma invoice that you should take note of:

• No legal binding 
• Limited validity 
• Does not guarantee the availability of goods  

Format of Pro Forma Invoice

Following are the details to mention on the Pro Forma invoice: 

• The term ‘Pro Forma invoice’
• Pro Forma invoice number 
• Name, address and contact details of the supplier
• Name, address and contact details of the client 
• GST registration number
• Invoice date 
• Supplier’s banking details, including account number and IFSC code
• Product descriptions along with unit costs and line-item totals
• HSN/SAC code 
• Proposed terms and conditions of the sale 
• Payment terms and conditions 
• Invoice validity 
• Authorized signatory 

Read More: Why Proforma Invoice is so useful?

What is a Tax Invoice? 

A tax invoice is a document that highlights the money to be paid against the goods or services. It also states additional charges such as transportation costs, packaging fees or insurance coverage. 

This type of invoice is widely used in accounting and calculating GST liability. It helps suppliers in recording their sales and provides other information related to the transaction. ‍

Advantages of Tax Invoice

Following are the advantages of using Tax invoices that you should know: 

• It is a legally binding document 
• Serves as a purpose of requesting payment 
• Used for accounting purposes 
• Aids the buyer in claiming ITC 

Limitation of Tax Invoice 

Following are the limitations of Tax invoices that you should keep in mind: 

• Error in Tax invoices can lead to compliance issues 
• Fake or fraudulent invoices may lead to significant financial losses 

Format of Tax Invoice 

Following is the information you should mention on the Tax invoice: 

• The term ‘Tax Invoice’
• Tax invoice number
• Name, address and contact details of the supplier
• Name, address and contact details of the client 
• GSTIN of supplier and buyer
• Invoice issue date
• Quantity of goods/services sold along with their description 
• HSN/SAC code 
• Individual price, discount (if any) and total 
• Tax rate and tax amount 
• Authorized signatory 

What is the Difference Between Pro Forma and Tax Invoice? 

The following section highlights the main differences between Pro Forma invoice and tax invoice: 

Feature	Pro Forma Invoice	Tax Invoice
Document Type	Quotation	Retail Invoice
Goal	Serves as a purpose of transaction agreement between the buyer and the seller	Serves as a purpose of goods or services supplied.
Compliance (GST)	Has no purpose in compliance	After GST implementation it serves as proof to claim Input Tax Credit.
Reversibility	Can be revised until the buyer and the seller mutually agree.	Cannot be revised.
Accounting	Is not used in accounting	Used for accounting purposes, to record sales
Legal binding	Has no legal binding.	Can be used as proof of supply in the Court.
On acceptance	Confirmation of sale	Creation of sale
Timing of Issuance	When an enquiry is received	When goods/service is partially or fully supplied

Tax invoice is used for accounting purposes and recorded under accounts payable for the client and accounts receivable for the seller/ supplier. A Pro Forma invoice is just a proposed estimate and the data cannot be used for accounting.

How to Generate Pro Forma Invoices in Munim Accounting & Billing Software?

Follow these simple steps to generate a Pro Forma Invoices in Munim Accounting & Billing Software: 

1. Click on ‘Sales’ 

2. Go to ‘Sales Invoice’

3. Add the necessary details

4. Click on ‘Save’

5. Then open the dropdown menu and click on ‘Download Pro Forma’

Summing Up 

So this was all about the difference between a Pro Forma invoice and a Tax invoice. We hope after reading this you will understand the difference between them and use it wherever applicable. For more such content, click here. 

Frequently Asked Questions on Pro Forma Invoice

What is the difference between Pro Forma invoices and commercial invoices? 

A Pro Forma invoice is a document that clarifies how much payment is to be made for the said goods or services, mentioning all the terms & conditions. While a commercial invoice is a formal payment request, and it is not negotiable. 

Can payment be made on a Pro Forma invoice?

No payments can be made on the Pro Forma invoice. It only formally conveys the total amount to be paid including taxes, discounts and other charges. 

Is a Pro Forma invoice a tax invoice?

No, there is a vast difference between a Pro Forma invoice and a Tax invoice. 

Is the Pro Forma invoice and quotation the same?

No, the Pro Forma invoice and quotation are not the same. However, both are preliminary documents that are sent to the customer before the actual transaction takes place. 

When to use a Pro Forma invoice? 

In the following scenarios you can use Pro Forma invoices: 

• For international trades
• Before order confirmation
• For opening a letter of credit
• For pre-shipment inspection