A business has to deal with several invoice types regularly. Invoicing acts as a form of communication with buyers and enables the smooth conduct of business. Organizations primarily deal in two types of invoices:
- Pro forma invoice
- Tax invoice
Pro forma invoice and tax invoice are often a part of the same order but play a different role for both parties. The tax invoice is an official document, whereas a pro forma invoice is a mere representation of the final cost from the seller’s end.
This article discusses the differences between pro forma invoices and tax or commercial invoices for a business.
What is a Tax Invoice?
A tax invoice is an official document. It is a commercial, non-negotiable vehicle that the supplier issues to the buyer.
A tax invoice displays all the vital information pertaining to the order and the parties involved and acts as legal proof of the transactions that took place between both parties. It includes details such as the name and address of the party, description of items sold, quantity and per-unit cost, total costs, discounts, taxes, and the final amount payable by the buyer.
What is a Pro Forma invoice?
Each of us calculates the cost of the items we are to buy before placing the order with the vendor. When we are unsure of the final expenses, we can request the seller to present us with a pro forma invoice.
A pro forma invoice is a preliminary bill of the sale generated before shipment or goods delivery. It is in no way a legal document and only informs buyers of the expected final costs pertaining to the order they want to place. It includes the cost of the purchased items, shipping and transport charges, taxes, and other relevant monetary items but is not recorded in the books or charged to the buyer.
Purpose of Pro Forma and Commercial Invoices
A pro forma invoice and a tax or commercial invoice serve different purposes. Let us delve into these.
A pro forma invoice is usually used in cross-border transactions. It is because it also covers the taxation element, especially customs. In addition, it contains an accurate description of the sale price and helps the buyer understand the rough amount they may have to pay before purchasing.
The tax invoice is an accurate description of the amount due against the purchases made by the buyer. It is a legal document that acts as proof of evidence that the items were sold by the seller to the buyer.
Uses of Pro Forma and Commercial Invoices
The use cases of a pro forma invoice and a tax invoice differ too.
As the name suggests, a pro forma invoice comes into play before the actual sales occur. Here, the potential buyer forwards an enquiry informing the seller of their wish to buy the items. The enquiry is followed by an RFQ (request for quotation). Once the seller receives it, they prepare a dummy invoice containing the estimated amount to be paid and other relevant details.
Even though it is not an official document, a pro forma invoice allows the importer to prepare for the process ahead. They can figure out how to make the final payment, obtain import licenses, and open a letter of credit, as the situation demands.
A pro forma invoice is a type of quotation used by international buyers to get their goods released from the port of entry. If the company uses the pro forma invoice for customs, they must produce the tax invoice within 120 days.
In case of gifts or goods not meant for sale or purchase, a pro forma invoice takes the place of a tax invoice and is the primary shipping document.
In contrast, a commercial invoice is a bill containing all the relevant information during the order process. It allows the buyer to clear the supplier’s dues and use them for taxation purposes. It also has additional details usually left out of a pro forma invoice. For example, a tax invoice contains:
- the HS tariff code (applicable in most countries),
- Incoterms, and
- other such details that you are unlikely to find in pro forma invoices.
Format of Pro Forma and Commercial Invoices
The pro forma invoice is the more concise of the two. Here are their contents:
Pro Forma Invoice
- Goods/services description and their quantity
- HSN/SAC codes
- Taxes
- Date of issue
- Address and GSTIN of the buyer
- Address and GSTIN of the supplier
- Terms of payment
- Validity
- Authorized supplier’s signature
- Seller’s bank details
Tax invoice
- Name, address, and GSTIN of the supplier
- Name, address, and GSTIN (if available) of the buyer
- A unique tax invoice number for seller’s reference (a mix of alphabets, numbers, and special characters)
- Invoice date
- State code (if sale value exceeds INR 50,000), state name, and delivery address, with name and address of the buyer
- Goods/services description and quantity
- The total taxable value of the order
- Tax component (customs and GST) with breakup for each part
- Total payable value after discounts and taxes, if any
- Explicitly mentioning if it is a reverse charge transaction
- Delivery address (if different from the place of supply)
- Signature of the supplier or their authorized representative
- Credit terms
Proforma Invoice Vs Tax Invoice: A Summary
| Basis | Pro Forma Invoice | Tax Invoice |
| Definition | It is a reply to an enquiry made by a prospective buyer | It is a commercial document that informs the buyer of the payment being due |
| Purpose | It presents the estimated timeline of delivery and the total amount that can be charged | It is proof of sale and legally binds both the parties to implement the terms of sale as agreed in it |
| Type | Quotation | Bill |
| When issued? | Before the supplier receives the order | After the sale is complete (partially or completely) |
| Negotiability | Non-negotiable | Negotiable |
Wrap Up
To conclude, a tax invoice or a commercial invoice contains all the requisite details about a transaction. In contrast, while a pro forma invoice can act as an invoice in some instances, it does not require to be expansive. It only contains the details needed to inform the buyer of the approximate outflow before placing the order.
Given the pro forma invoice looks almost like a tax invoice, we often fail to differentiate the two. So, it is vital for businesses to understand the intricacies surrounding the two and use them appropriately.
