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Difference between Tax Invoice and Proforma Invoice


Tax invoice and proforma are two very different aspects of a business that are often confused. With this article, we will try to clear this confusion and explain the purpose for each of these document types.

[6 min read]
VisionERA
As a business owner, you deal with invoices and other commercial documents. When we talk of invoices, they act as a record of goods or services exchanged between you and your vendors in exchange for money. Detailed invoicing records help ensure clarity and seamless conduct of your business.

Proforma and tax invoices are the two broad categories you need to deal with. But are you aware of the differences between the two and know what sets them apart? This article offers a comprehensive guide that helps you differentiate between the two and know what type of invoice you should use in different circumstances.

What is a Proforma Invoice and how does it work?


A proforma invoice is an estimated invoice that sellers share with prospective buyers before negotiating the terms and conditions. The seller provides this document to the buyer to understand what they will need to pay if they finalize the sale.

It is essentially like an offer letter that allows the buyer to understand the pricing details and the terms and conditions. A proforma invoice does not represent the final price but gives a rough estimate of how much sum sellers will make from selling a product or service. It also lets sellers know how much money they will need to make to cover costs and earn profit.

The purpose of a proforma invoice is to provide an estimate of costs before any work has begun. It allows both parties involved in the transaction to determine if they are comfortable with the money that will change hands during the process. Buyers also get to negotiate the pricing and other terms and conditions specified by the seller.

Proforma invoices often get used when sellers want to sell their products or services to a new customer who does not have experience dealing with them. It can be helpful for businesses that deal in bulk and have never worked with an individual customer before.

A proforma invoice also helps when sellers have set prices for different packages or quantities. However, they want to know what price range will work best for the customer before moving forward with the sale. It helps avoid misunderstandings if one party is unclear about what they want from the purchase.

What items to include in a Proforma Invoice?


It is essential to add a note at the top of the proforma invoice stating, “Not A Commercial Invoice.” Meanwhile, besides that note, here are some other elements you need to include in a proforma invoice.

  • Invoice number
  • Invoice issue date and due date
  • Seller’s name, address, and contact details
  • Buyer’s name, address, and contact details
  • Seller’s bank account details
  • Goods and services description, including unit cost
  • Seller’s terms and conditions
  • Signature of authorized signatory
  • Tax details

What is a Tax Invoice and how does it work?


A tax invoice is a document that states the money paid for buying goods and services. In this case, it refers to the money paid by a buyer to purchase something from the seller. The tax invoice will also state the amount paid to cover additional costs like shipping fees or insurance coverage.

It differs from a business receipt as it contains comprehensive details about the transaction. There is information about the buyer and seller, delivery date, quantity and price of goods sold, relevant tax information, and discounts.

A tax invoice is also essential for accounting, bookkeeping, and tax purposes. Tax invoices help suppliers record their sales and provide the related details. In addition, businesses must provide a copy of their tax invoice when requested by customers who purchased goods or services from them.

What items to include in a Proforma Invoice?


The invoice should mention at the top that it is a tax invoice. Here are various other elements you need to mention in a tax invoice.

  • Invoice number
  • Invoice issue date and due date
  • Seller’s name, address, and contact details
  • Buyer’s name, address, and contact details
  • Seller’s bank account details
  • Goods and services description, including unit cost
  • Discount details, if applicable
  • Signature of authorized signatory
  • Tax details

Major differences between a Proforma Invoice and a Tax Invoice


There are several differences between a proforma and a tax invoice that you should know. Let us look at them here in detail.

Intended Use


A proforma invoice is an estimated amount the buyer will get invoiced for availing goods or services from the seller. A proforma invoice includes rough costs associated with the product but does not include any taxes. A tax invoice is an official document containing all applicable taxes and the total amount owed by the buyer.

Revisions


One of the significant differences is that a proforma invoice can have revisions, while tax invoices cannot. Think of revisions as a change to the invoice. For example, proforma invoices give a rough estimate of the sale. Buyers can negotiate on the amount and get it revised. A tax invoice is a final invoice the buyer needs to pay without negotiating.

Accounting


You cannot use a proforma invoice for accounting purposes. However, you can use a tax invoice for the same. It is a legal document that you can use to track income and expenses.

Legalities


A proforma invoice is not legally binding and is a sales draft that allows the seller to offer an estimate of the intended purchase. The buyer can accept or reject this invoice. A tax invoice is legally binding, and every business needs to issue one post the delivery of goods and services to seek payment.

It contains vital information about the product, such as its type and price. The tax invoice serves as proof of purchase for both parties, who can use it for tax purposes or other legal matters related to their business relationship.

Timing


Sellers issue a proforma invoice when the customer sends a purchase inquiry. It shows the money the customer needs to pay for the product or service. However, it does not reflect the final amount the seller will charge after completing the purchase.

Sellers issue a tax invoice during or after the completion of selling the goods or services. The document shows the money charged for products or services and related taxes.

Negotiations


A proforma invoice is negotiable and subject to change, while the tax invoice is non-negotiable and final. Proforma invoices help sellers estimate the amount they expect to receive from the buyer. The proforma invoice's purpose is to ensure both parties agree on the total price before proceeding with the transaction.

If there are any changes during negotiations, sellers can make adjustments before finalizing things with the buyer. Tax invoices are different because they do not require any negotiation. They include the agreed-upon amount, and buyers have to pay them in full.

Can I use a Proforma Invoice as a Tax Invoice?


No, you cannot use a proforma invoice as a tax invoice. A proforma invoice is an estimate of the cost of the goods or services for the buyer. It is only meant for buyers to understand how much something will cost them. A tax invoice, on the other hand, is an official document that includes the final price and tax details.

Should a Proforma Invoice include tax details?


Yes, a proforma invoice can include tax estimates when the buyer enquires about a product or a service. An example is when you are selling an item to someone, and they ask you if the price includes tax. You would then add the estimated tax amount to your proforma invoice. It will help the buyer know what they should expect to pay when you send them the final tax invoice.

Is a Proforma Invoice a Legal Document?


No, a proforma invoice is not a legal document. It is a common misconception that proforma invoices are legally binding. The reality is they are not. A proforma invoice is only an estimate of what the final invoice will look like. It does not guarantee that the seller will get paid for the product or service at their desired price. The buyer can always negotiate the price and terms and conditions.

What is a Proforma Invoice for Advance Payment?


A proforma invoice for advance payment helps a supplier bill the buyer for products and services before delivery. The supplier will send the seller a proforma invoice based on their estimate of the final invoice when everything gets delivered and accounted for. The buyer can make a part or full payment based on the agreed terms as part of the proforma invoice for advance payment.

Bottom line


A proforma invoice is the invoice issued by the supplier when a buyer inquires about specific goods or services. It is an estimate of the overall amount and does not have legal importance. The buyer may or may not accept the pricing or terms and conditions and may ask for negotiations.

A tax invoice is the final invoice issued after the seller has delivered the goods or services. It is legally binding, and the buyer needs to pay the amount they had agreed to. Since there are legal differences, you should also be aware of them while using both invoices.

If you are looking for solutions related to processing your tax invoices with speed and accuracy, VisionERA can help. It is an intelligent document processing solution for document-heavy businesses that need agile operations. Backed by a 100% performance guarantee, VisionERA will help you experience process invoices 20x faster and allow your team to experience 3x productivity.

Contact us today for a free product demo of VisionERA.


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