1. Meaning of Pro Forma invoice
Pro forma invoice is a document that provides information regarding the particulars of the goods and/or services yet to be delivered to the buyer/customer. It details estimated prices of the available goods and/or services. It also states the estimate of any commissions, applicable taxes, weight of shipment, shipping costs etc.
It is issued by a supplier/retailer to an enquiring buyer/customer. It is usually issued before the issue of Tax/commercial Invoice and is not same as a commercial invoice.
2. When is Pro forma invoice used?
A pro forma invoice is made before the sale actually happens. A supplier will issue a Pro forma invoice if a customer requests him to produce a document for goods and/or services yet to be delivered. For example: A two wheeler customer might agree to the price of a bike on the pro forma invoice. The supplier will deliver the bike once it is ready and the customer will pay when the invoice is received. The final invoice amount will be the same or close to the amount on the pro forma invoice.
Pro forma invoices are more often used for customs purposes on imports or exports for a smooth delivery process.
3. Purpose of issuing Pro forma invoice
To provide estimated sale price of goods yet to be delivered and/or services yet to be rendered (estimate of total cost).
To provide an understanding of contents to be shipped, value of the goods, shipping time, etc., to the customer. So the customer knows what to expect.
Pro forma invoices are most useful when two companies are doing business together for the first time.
“Thus, issuing a pro forma invoice declares the supplier’s commitment to the buyer to provide the goods and/or services described at specified prices”.
NOTE: No law prescribes a pro forma Invoice but this is issued as part of best practices in business.
POINTS TO BE NOTED:
A pro forma invoice should contain the phrase “Pro forma invoice” and may also include the phrase “This is not a GST invoice”.
Customer is not required to make any payments on the goods and/or services detailed.
Supplier should not record a pro forma invoice as accounts receivable, and
Buyer should not record it as accounts payable.
4. Contents of Pro forma invoice
A pro forma invoice should include the following information:
- Unique invoice number.
- Address of the supplier.
- Address of the prospective buyer.
- Description of good and/or services including their unit costs and line-item totals.
- Validity of the pro forma invoice
- Proposed terms of sale.
- Proposed terms of payment, if any.
- Certifications required by “Customs Authorities” if any.
- Signature by an authorized person from supplier’s company.
5. Format of Pro forma invoice
There are no guidelines prescribing the exact format of a pro forma invoice.
A pro forma invoice may look almost exactly the same as a commercial invoice. However, it should be clearly labeled “pro forma” which reflects the fact that it is only an estimate and should not be paid until the work is done and the final tax invoice is issued.
Sample Format of Pro forma invoice underunder Pre-GST laws
Sample format of Pro forma invoice under GST law
6. Significant changes in Pro forma invoice under GST as compared to GST Pro forma invoice
Pro forma invoices under pre-GST law and GST law are not much different in format or content. They almost remain the same except for these:
GST Pro forma invoice contain GST registration number while the former contains VAT / ST / Sales Tax registration number.
GST Pro forma invoice contains additional information regarding HSN Codes of Goods, SAC Codes of Services and classification tax rates into SGST, CGST and IGST based on the whether the supply is an intra-state supply or inter-state supply.
7. Differences between invoice, pro-forma invoice, estimates and purchase order
|Particulars||Invoice||Pro forma invoice||Quotation/Estimates||Purchase Order|
|Meaning||Invoice refers to a commercial document issued by the supplier to the buyer containing the details of goods and/or services supplied to him & notify the buyer that payment is due.||Pro forma invoice is a document that provides information regarding the particulars of the goods and/or services yet to be delivered, to the buyer/customer.||A formal estimate that shows the goods and/or services needed and the total amount owed to the products or services.||A purchase order is a document issued by the buyer and sent off to the supplier detailing the list of the goods and/or services, with an aim of making purchase.|
|Objective||To notify the buyer that payment is due.||To help the buyer in taking decisions, regarding whether to place an order or not.||To provide estimated sale price of goods yet to be delivered.||To order goods and/or services from the supplier.|
|Time of issue||Before payment is received by the supplier.||Before Goods and/or services are delivered to the buyer.||On buyer’s request before goods and/or services are delivered to the buyer.||After the receipt of quotation / pro forma invoice from the supplier.|
|Issued to||Buyer / Customer||Buyer / Customer||Buyer / Customer||Supplier|
|Effect of Acceptance||Confirmation of sale||Creation of sale||Creation of sale||Contract of Sale|
8.Frequently Asked Questions
Is it a real invoice?A pro forma invoice is not a true invoice.
Can a customer negotiate on the details specified in the pro forma invoice?Yes, a pro forma invoice is a negotiable document. A customer can negotiate on various details like price, shipping costs, delivery time etc. It can be amended even after it is signed by both parties.
What are the reasons to amend the details of the pro forma invoice?There could be several reasons to change the details of the pro forma invoice.
Some of them are as follows:
Buyer may find the prices too high and may demand a discount.
Buyer may change the quantity of the order based on local demand.
Buyer may demand a closer shipment date in certain circumstances as the delivery date specified by the supplier is unacceptable.
Change in Mode of transport in case of urgent delivery request by the buyer. For example, mode of transport could be changed from seaways to airways.
What is the methodology to revise pro forma invoices?Invoice number of a pro forma invoice should be revised, after the contents of the pro forma invoice are changed.
Can a proforma invoice be accounted in the Books of Account?A pro forma invoice is not a true invoice. Therefore, no entry is made in the books of accounts for the financial transaction.
Is the Pro-forma Invoice binding upon the parties in a supply transaction?A pro forma invoice is a dummy invoice. It does not have any legal validity. Hence it does not legally bind either party in a supply transaction.
What is the validity period of a pro forma invoice?Validity of a pro forma invoice varies from business to business, industry to industry. The validity is as mentioned on the pro forma invoice.
Which are the principal industries where Pro-forma Invoice is used?Businesses in virtually all industries often use pro forma invoices to satisfy their internal purchasing-approval process.
These include: Manufacturing, Import/Export, Trading, Wholesalers, Dealers etc.