Proforma Invoice Under GST: What It Is and How It Works

Imagine you’re finalizing a deal, but the goods or services haven’t been delivered yet. How do you provide a detailed cost breakdown? Enter the proforma invoice—a crucial tool under GST that offers clarity before finalizing the transaction. Let’s uncover what it is, how it works, and why it’s important for your business.

BOOK A FREE DEMO




    What is a Proforma Invoice?

    A proforma invoice is a preliminary bill of sale sent from a seller to a buyer before the sale has been finalized. It reflects an estimated list of items or services with prices, quantities, and terms but is not a payment request. It is essentially a quote or a formal offer containing pertinent information for the buyer to evaluate before the deal takes place.

    Under GST, while no specific format is legally mandated, consistency in the template is crucial for ease of compliance and documentation.

    Features of a Proforma Invoice Under GST

    A proforma invoice outlines estimated costs, taxes, and terms of sale but is not a legal request for payment. Instead, it’s used for customs, budgeting, and providing clarity on terms. Key features include –

    GSTIN Information

    Proforma invoices should include the supplier and recipient’s GSTIN (Goods and Services Tax Identification Number). This is critical for meeting the GST framework’s requirements.

    HSN/SAC Codes

    The invoice has to mandatorily contain the HSN (Harmonized System of Nomenclature) codes for goods and the SAC (Services Accounting Codes) for services for correct classification. These codes are required for expense classification and correct taxation.

    Estimated Transaction Costs

    Based on the supply type, the estimated prices of the goods or services provided do not include taxes levied, whether CGST, SGST, or IGST. These estimates provide the buyer with an idea of the cost involved.

    Terms of Sale and Payment

    A proforma invoice details the terms of sale, such as delivery time frames, modes of payment, and any applicable advance payments or discounts.

    Validity Period

    It contains the validity period, which is the duration for which quoted prices and terms will be valid. This will help set appropriate expectations between the buyer and seller.

    Customs Documentation

    For international transactions, proforma invoices provide the information required for customs clearance, such as the description of the goods, the value of the shipment, and other certifications required by customs authorities for smooth clearance across borders.

    Non-binding Nature

    A proforma invoice is not a legal payment request. It serves as a preliminary document and is often used to provide transparency about the transaction before the official invoice is issued.

    Changes from Pre-GST Era

    – Under GST, HSN/SAC codes and GSTIN are mandatory, unlike the older VAT/CST system.

    – GST proforma invoices explicitly classify the tax type, whether SGST, CGST, or IGST, depending on the nature of the transaction (intrastate or interstate).

    When is a Proforma Invoice Used?

    A proforma invoice is typically issued before the actual sale takes place, offering a preliminary document for an upcoming transaction. It estimates the goods or services to be delivered and their associated costs, including taxes, shipping, and any other charges. It’s not a payment request but serves several key domestic and international trade purposes.

    • Pre-sale Documentation: Outline of likely expenditure and description of goods or services before a transaction is finalized.
    • International Trade: Used for customs clearance, providing shipment details and estimated value for export/import.
    • Advance Payments or Deposits: These are given when you have to pay some money upfront before the complete sale takes place.
    • Establishing Terms: This process lays out payment terms, delivery dates, and other conditions before sending a final invoice.
    • Budgeting and Financial Planning: Indicate the estimated expenses to buyers so they can budget and plan financially well.
    • Documentation for Lenders or Investors: Documented outline of a pending sale used to secure financing or credit.

    Get a Free Demo – Best Billing and Invoicing Software

    Contents of a Proforma Invoice Under GST

    A proforma invoice should include the following essential details –

    • Unique Invoice Number: A distinct invoice reference number for tracking the document.
    • Date of Issue: The date the pro forma invoice is prepared or issued.
    • Supplier’s Address: The location of the supplier issuing the invoice.
    • Buyer’s Address: The address of the prospective buyer receiving the goods or services.
    • Description of Goods/Services: Clear details of items, including unit prices and line-item totals.
    • Invoice Validity:The validity period of the pro forma invoice.
    • Proposed Terms of Sale: The terms and conditions for the sale of goods or services.
    • Proposed Payment Terms: Any suggested payment arrangements, if applicable.
    • Customs Certifications: These are required certifications for customs clearance, if relevant.
    • Authorized Signature: Signature from an authorized person representing the supplier.

    How Do Proforma Invoices Work Under GST?

    Under GST, a pro forma e-invoice functions as a preliminary document issued by a seller to provide an estimate for goods or services before the actual transaction. It includes details such as product description, quantity, price, and applicable taxes. Though it’s not a tax invoice, it helps facilitate smooth transactions, particularly in international trade for customs clearance and planning. Here’s how it works –

    • Pre-sale Estimate: Released before the delivery of products/gig and offers an estimated price and terms.
    • GST Compliant: GSTIN, HSN/SAC codes, as well as applicable taxes (SGST, CGST, or IGST).
    • No Immediate Payment: Payment is not due until the final tax invoice is raised.
    • Customs Clearance: Applicable in customs at import/export transactions.
    • Documentation for Advances: Helps with advance payments and input tax credit claims once the final invoice is issued.

    Get a Free Trial – Best GST Accounting Software For Small Business

    Proforma Invoice vs. Tax Invoice: Key Differences

    Below are the key differences between a proforma invoice vs. tax invoice –

    1. Purpose: A proforma invoice is an estimate before goods/services are delivered, while a tax invoice is a final document requesting payment after delivery.
    2. Payment: Proforma invoices don’t require immediate payment, whereas tax invoices demand payment.
    3. GST Compliance: A tax invoice includes GST details; a proforma invoice only mentions estimated taxes.
    4. Legal Binding: Tax and proforma invoices are legally binding

    Conclusion

    In conclusion, a Proforma Invoice under GST is essential for estimating costs before actual transactions, especially for customs and budgeting. It ensures clarity between parties before formalizing the sale. For streamlined GST invoicing, explore our BUSY GST Accounting Software today.

    Frequently Asked Questions

    • Is cloud-based accounting software safe for my business?
      Yes, cloud-based software uses encryption and secure protocols to protect data, ensuring high levels of security and compliance.
    • Can offline software be upgraded to cloud-based?
      Many offline accounting software options offer cloud-based upgrades, allowing smoother transitions and improved data storage functionality.
    • Which option is more cost-effective?
      Cloud-based software is often more cost-effective due to subscription models, reduced IT infrastructure costs, and easier maintenance.
    • Can I use both cloud-based and offline accounting software together?
      Yes, both can be used together, often with data syncing features, providing flexibility and access to diverse platform functionalities.
    • Home
    • /
    • GST
    • /
    • proforma invoice under GST what it is and how it works

    BUSY is a simple, yet powerful GST / VAT compliant Business Accounting Software that has everything you need to grow your business.

    phone Sales & Support:

    +91 82 82 82 82 82
    +91 11 - 4096 4096