What is a proforma invoice?

A proforma invoice looks like a normal invoice. It has the supplier's name, the buyer's name, items, quantities, rates, GST and a total. The difference is timing and purpose. It's sent before the sale is final, to tell the buyer exactly what they will be billed if they go ahead. Think of it as a very formal quotation.

When suppliers send one

You'll mostly see proforma invoices in four situations:

• The supplier wants an advance before they start. A fabricator in Rajkot won't cut steel for a custom order until 30% is paid, so they send a proforma for the full value and ask for the advance against it.
• The buyer needs internal approval. Your finance team may want a document with the exact amount, GST and freight before they release a payment or sign off a purchase requisition.
• Imports. Banks usually ask for the overseas supplier's proforma invoice when you send an advance remittance or open a letter of credit.
• The final quantity or price isn't fixed yet, for example when goods are sold by weight and the exact weight is known only at dispatch.

Proforma invoice vs tax invoice

This is the part people get wrong. GST law doesn't recognise a proforma invoice as a tax document. Only the tax invoice counts.

So if you pay against a proforma, make sure the supplier sends a proper tax invoice when they deliver. Without it you can't claim the GST, and your three-way matching has nothing to match. When a supplier takes an advance, GST rules also expect them to issue a receipt voucher for it. Whether tax is payable on the advance itself depends on whether it's goods or services, so ask your CA if you're unsure.

Proforma invoice vs quotation

They overlap a lot. A quotation usually comes early, in reply to an RFQ, and may be one of several you are comparing. A proforma usually comes after you've more or less chosen the supplier. It's laid out like the final invoice, with your billing and shipping details filled in, so it can be approved and paid against directly.

What a good proforma invoice includes

• The words "Proforma Invoice" at the top, so nobody books it as a real bill.
• Supplier and buyer names, addresses and GSTINs.
• Item description, HSN or SAC code, quantity, unit and rate.
• GST rate and amount, split into CGST and SGST or IGST as it will be on the final invoice.
• Freight, packing and any other charges.
• Payment terms, including how much is due in advance.
• Validity, for example "prices valid for 15 days".
• Bank details for the advance.

A buyer's checklist

Before paying against a proforma, check it against your purchase order or the agreed quote. Rates creep. Freight appears that wasn't discussed. GST is calculated on the wrong rate. Our GST calculator is handy for a quick check. Also confirm the bank account on the proforma matches the one in your vendor master. Fake proformas with changed bank details are a known fraud, and a phone call to a number you already have is the simplest defence.

In accounts, record the payment as an advance to the supplier, not as an expense. When the tax invoice arrives, adjust the advance against it. Advances paid on proformas that never get a tax invoice are one of the messier things to clean up at year end.