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What Is A Proforma Invoice? Everything You Need To Know

The term “pro forma” was originally in Latin, meaning “as a matter of form” or “for the sake of form”. As a business owner who receives an invoice marked as a pro forma invoice, you could have several questions. A proforma invoice binding upon the supplier must be acted within a time frame, GST charge, etc. 

Meaning of proforma invoice

Use and application of proforma invoice

Contents and format of proforma invoice

GST vs pre-GST proforma invoice

Differences among tax invoice, proforma invoice, estimates, and purchase order

Meaning of proforma invoice

A retailer issues a pro forma invoice to an enquiring buyer or customer. A pro forma invoice refers to a document giving out details about the goods or services yet to be shipped to the buyer or customer along with its price. It mentions the estimated price of the goods or services for sale. It further contains the estimate of any commissions, relevant taxes, the approximate weight or quantity of the shipment, any shipping costs, etc. 

Uses and application of proforma invoice

A pro forma invoice is issued before the sale. For instance, a vendor will issue a pro forma invoice if a buyer requests him to share a written price quote for goods or services that they are interested in. Accordingly, it is generally raised before the issue of a tax invoice or a commercial invoice.

The final invoice value will be either the same or close to the value on the pro forma invoice. Pro forma invoices are mostly used in customs compliance for imports or exports to ensure a smooth delivery.

For instance, a two-wheeler consumer may consent to the bike price given on the pro forma invoice. The supplier will then deliver the bike, and the consumer will make payment when the tax invoice is received.

The purpose or uses of the proforma invoice can be listed as follows-

  • To give an estimated sale price of goods yet to be shipped or services yet to be given, which is the estimated total cost plus the profit margin.
  • To lay an understanding of items to be shipped, their value, the shipping time and date, etc., to the buyer. 
  • To declare the vendor’s commitment to the buyer for delivering the goods or services detailed at special prices

Furthermore, pro forma invoices are useful when two firms are getting into a business arrangement with each other for the first time.

The buyer must not pay for the goods or services detailed in the proforma invoice but should wait for the tax invoice. Hence, the vendor should not account or record a proforma invoice as an accounts receivable transaction, while the buyer should not account for it as accounts payable entry.

Contents and format of proforma invoice

A proforma invoice must include the following details:

  • A unique invoice number
  • Date of making it or issuing it
  • Supplier’s name and address
  • A prospective buyer’s name and address
  • Particulars of goods or services, with their unit price and line-item value totals
  • The period that proforma invoice is valid
  • Proposed terms and conditions of sale
  • Tentative terms of payment, if any
  • Certifications by “Customs Authorities” if needed
  • Signature by an authorised person on behalf of the supplier.

No law prescribes an exact format for a proforma Invoice. However, the document is issued as a best business practice. A proforma invoice may look similar when compared with a  commercial invoice.

Nevertheless, it must be specifically labelled as “pro forma”, and could also mention that “This is not a GST invoice”. The proforma invoice is solely an estimate and must not be referred for payment until the work is completed and the tax invoice is issued.

Below is a sample invoice created on the invoicing software with payment collections tracking.

GST vs pre-GST proforma invoice

Pro forma invoices issued under the pre-GST law, compared to the proforma invoice under the GST law, do not vary much in format or content. Both almost contain the same particulars except the following:

  • GST proforma invoice contains GSTIN or the GST registration number. In contrast, the proforma invoice under the pre-GST regime mentions VAT/ CST/ Sales Tax registration number.
  • The GST proforma invoice has additional information about the Harmonized System of Nomenclature (HSN) codes for all the goods and Service Accounting Codes (SAC) for all the services. Further, there is GST classification into components such as State GST, Central GST and Integrated GST depending upon whether the supply can be concluded as an intrastate or interstate by nature and the place of supply of the supplier.

Differences among tax invoice, proforma invoice, estimates and purchase order

 

Attributes Tax invoice Proforma invoice Estimates or Quotations Purchase order
What is it? A tax invoice is a commercial document given by the supplier to the buyer which contains the information of goods or services provided and also informs the buyer that payment is due. A proforma invoice refers to a document that gives out information about the goods or services not yet delivered to the buyers. An estimate provides the list of goods or services required and the total value to be charged on such goods or services. A purchase order refers to a document issued by the customer and shared with the supplier containing details of the goods or services for purchase.
Purpose To inform the buyer that payment is due. To aid the buyer in deciding whether to order or not. To share an estimated sale price of goods yet to be shipped. To order goods or services from the vendor.
When to issue? The supplier issues it before receiving the payment. The supplier issues it before goods or services are shipped or rendered to the buyer. On buyer’s ask before goods or services are delivered to the buyer. After receiving the quotation or proforma invoice from the supplier.
Who issues it? Vendor Vendor Vendor Buyer
To whom is it issued? Customer Customer Customer Vendor
Consequence of accepting the issue To confirm the sale Sale creation Sale creation Sale contract
Negotiability It is not negotiable It is negotiable It is negotiable Not applicable

 

An invoicing software with payment collection feature brings an online revolution in managing the business of small and medium-sized enterprises. You can send bills with QR codes and payment links to get payments easily and faster. Further, track the payment status on such apps within seconds. One can conveniently convert estimates into invoices with a single click. From bills, you can create e-way bills, credit or debit notes and e-invoices as well! 

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