Proforma Invoice: Insights & Its Role in International Trade

The proforma invoice is the bill of goods or services used before shipment. It is used to communicate the supplier’s intention. The common functions of proforma invoices are preparing customs clearance documents, import licenses, letters of credit, international shipping documents, and insurance documents.

All businesses engaging in international business must have accurate proforma invoices. They should include all necessary information. When applied correctly and appropriately, you can enhance your trading operations and streamline international trading. This article will help you to find several tricks of international trade and how to work with a proforma invoice.

Proforma Invoice: Definition and Purpose

Proforma invoices are preliminary determinations of the costs in a given transaction. They provide information about a product’s price, shipping cost, and other charges like taxes. A proforma invoice is different from the final invoice as the latter is a legal document with actual trading records.

Sellers can use a proforma invoice to control the expectations of the buyer. It helps plan and negotiate the terms and conditions before entering the transaction.

Key Characteristics of a Proforma Invoice:

• The Preliminary Nature: A proforma invoice is more like an initial plan. This draft allows modification of some aspects before the final transaction. Therefore, it acts as a more versatile approach to mend the features of the contact.
• A Guide to Anticipated Expenses: It offers a clear picture of the total cost involved. It includes the price of the goods or services, the shipping cost, taxes, and any other extra charges. They assist the buyers in determining the approximate cost of a transaction and aid the sellers in providing buyers with an approximation of the total cost. A proforma invoice facilitates effective financial planning.
• Non-Legal Status: Proforma invoices are not legally enforceable invoices. Only the final invoices have legal consequences attached to them. They are not legally binding contracts. They set expectations of a possible sale. This legal status implies that while they contain valuable information and serve as the starting point of the negotiations, the parties are not legally bound to make any transaction.

Primary Purposes of a Proforma Invoice

• Obtaining Import/Export Licenses: Many countries demand specific import and export licenses when dealing with certain goods. A proforma invoice provides information about the nature and value of the goods to be shipped. A proforma invoice facilitates the approval of licenses for international trade.
• Arranging Shipping and Insurance: Shipping and insurance companies use proforma invoices to estimate freight charges and insurance value. A proforma invoice contains sufficient details on the goods, their value, and the expected shipping method, enabling the parties to calculate the costs and insure the goods adequately.
• Securing Financing: Banks may need a proforma invoice to consider the creditworthiness and the best financing terms. It contains the pricing details and payment conditions that aid in evaluating the risk.
• Providing a Preliminary Quote: Proforma invoices are also employed to provide a potential buyer with a preliminary price quote to determine the cost and conditions of the transaction. This quote assists the buyers in making the right decisions by presenting expected or potential costs. It helps modify expenses before the final bill is prepared and issued to the trading partners.

Essential Elements of a Proforma Invoice

A well-structured proforma invoice should include the following key elements:

1. Essential Details for Identification

The proforma invoice includes the seller’s and buyer’s name, address, phone number, and GST number. It makes the identification of both parties easy.

2. Unique Identifier and Timestamp

Every proforma invoice should have a number assigned to it for easy tracking. This identification number provides orderliness to both parties’ filing systems and enables fast retrieval of an invoice when required. The creation date of the proforma invoice must be stated. Once a transaction has started, this data can help track delivery and payment.

3. Description of Goods or Services:

The proforma invoice includes a detailed description of the product being sold. All the product specifics are included to avoid confusion or disagreements between the seller and the buyer. These specifications include size, weight, model number, or brand. These details confirm that the products satisfy the buyer’s needs and conform to set expectations. A thorough description also helps the delivery of the right products. 

4. Accurate Quantities and Pricing

The proforma invoice must indicate how many products are offered and at what price. This information is crucial to arrive at the total cost. It is also essential to enable the buyer to receive the right quantities of each product. It helps in the efficient control of inventories and order fulfilment. 

5. Total Amount: Subtotal and Grand Total

The subtotal for each item is calculated by multiplying the quantity with the unit price. 

The subtotals are summed up to get the total amount due. It is effective to add a total to avoid misunderstandings between the buyer and the seller.

6. Payment Terms and Due Date

 A proforma invoice mentions the accepted forms of payment, such as bank transfer, credit card, or a letter of credit. It aids in simplifying the payment process. A defined date helps ensure all the parties agree to the expected timelines.

7. Specifics of Incoterms and Shipping Method

The proforma invoice includes the international commercial terms (Incoterms) to define the distribution responsibilities between the seller and buyer. They include several aspects concerning transportation, insurance, and the point of shifting of risks. It also mentions the selected means of transport like air, sea, or land. This information is crucial to plan shipments effectively.

8. Legal Authorisation

The proforma invoice is signed, and it is obligatory to provide the signature of an official employee of the seller company. This signature shows that the seller agrees with the information in the invoice and will supply the agreed goods or services. Although a proforma invoice is not a legal document, the signature shows the willingness of the seller to complete the transaction. It creates a legal relationship between the parties by creating a standard for future transactions or modifications.

Legality of Proforma Invoices: Are They Binding?

Although it is critical in commercial transactions involving different countries, most cannot be legally enforceable. Proforma, in contrast to final invoices, are issued before the actual delivery of goods or services. The document does not establish a legally binding contract for the agreed sale.

Circumstances Under Which Proforma Invoices May Become Binding:

However, there are certain circumstances under which a proforma invoice may become legally binding:

1. Express Agreement: An agreement between the seller and the buyer may enable the proforma invoice to be formally recognised as a contract. This agreement may be in writing or an oral consent as projected by the companies involved. The express agreement ensures both parties have agreed to abide by the provisions stated in the proforma invoice by making this document legal.
2. Implied Agreement: The general conduct of the parties leads to the conclusion that they have complied with the terms of the proforma invoice even if there has been no express ascent. For example, when the buyer does not argue about the proforma invoice but goes further to accept the goods or services delivered, he or she may be deemed to have accepted the terms of the proforma invoice. It creates an impression that the buyer endorsed the terms supplied within the proforma invoice and may transform the document into an actual contract.
3. Incorporation into a Contract: The original invoice can be incorporated into the actual contract. This process makes the terms of the proforma invoice legal as part of the binding contract, and therefore, both parties agree to the terms laid down.

Can a Proforma Invoice Be Cancelled?

It is possible to cancel the proforma invoice to minimise conflicts and streamline international shipping. The ability to cancel a proforma invoice depends on several factors, including:

• The proforma invoice can be cancelled with a mutual agreement between parties.
• The cancelling of a proforma invoice depends on the stage of the transaction. 

Factors Influencing the Cancellation Process:

1. Advance Notice: Ensure that you give at least three business days’ notice of cancellation of a proforma invoice. This provides an opportunity for the other party to plan accordingly. Avoid negative consequences by sending notifications on time. Giving prior notice is useful as it is professional, ensures that the other party does not hurt your reputation and prevents disagreements.
2. Cancellation Fees: Some sellers may charge cancellation fees when the buyer cancels the order after issuing the proforma invoice. The contract penalty is usually intended to give the money back to the seller for damages that may have been incurred.
3. Existing Contracts: Revocation of the proforma invoice may impact the rest of the contract under which the proforma invoice was issued. When the proforma invoice is cancelled, the whole contract could be influenced to change the renegotiation of the terms.
4. Goods or Services Already Provided: If the seller has initiated supplying goods or services based on the proforma invoice, calling off the order will become more cumbersome and expensive. In such occurrences, the buyer may have to bear penalties.

Pro Tip: It is advisable for online sellers to clearly articulate the rights they reserve by permitting the cancellation of proforma invoices.

Proforma Invoices vs. Other Invoice Types: Key Differences

Proforma Invoices vs. Commercial Invoices

Proforma invoices are used before the actual delivery of goods. They give the buyer a general idea of the cost, such as the price, shipping cost, and other costs. Commercial invoices are raised for commercial purposes after the delivery of goods or services. 

Proforma invoices do not contain legal obligations. They are used to estimate costs but do not create legal relations binding upon the parties. However, commercial invoices are legal and contain the record of the terms of sales and the final payment amount in legal terms. They draw an obligation that can be legally enforced on the seller and the buyer in case of any litigations.

Proforma Invoices vs. Tax Invoices

The most common application of proforma invoices includes customs, shipment handling, and addressing financial issues. They assist in enabling the early stages of a transaction by indicating the costs and terms before the sale. Tax invoices contain information needed for tax purposes. They provide evidence to tax authorities and help recover tax credits.

Tax invoices are legal documents that the buyer and seller use as a record for taxation. These are crucial to meet legal requirements on tax and can prove claims for tax credits or tax deductions. Proforma invoices, on the other hand, are not legal documents and do not confirm the transaction in the legal system. They are forecasting documents for expense estimates.

How GST Has Transformed Proforma Invoices Compared to Pre-GST

Pre-GST Era: Before the Goods and Services Tax (GST) system was implemented in India, proforma invoices were used for customs and shipping requirements. These invoices gave estimated costs for shipments. There was no need to meet tax compliance standards, making cross-border trade and customs procedures easy.

Post-GST Era: Since its introduction, GST has caused considerable changes in the role of proforma invoices in India:

• Tax Implications: The proforma invoices include several tax implications, especially for cross-state sales. It must state the selling and purchasing firms’ GSTINs. This requirement ensures all the parties are registered under GST to help the authorities easily track tax remittances. Proforma invoice assists in making estimated costs correspond with taxes as per the governing GSTIN laws.
• Revised Format: The format of proforma invoices is standardised to meet the GST regulations. This change simplifies maintaining consistency and accuracy with the estimates given at the initial stages. It also enables buyers and sellers to follow GST compliance.
• E-Way Bill Requirements: In the case of cross-state sales of goods that exceed a threshold, the GST rules require the creation of an e-way bill before the transfer of goods. The proforma invoice serves as the source for the e-way bill. 

ShiprocketX: Effortless Customs Clearance with Minimal Paperwork

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1. Real-Time Tracking- This feature is critical in increasing transparency and allowing sellers to mitigate issues that affect delivery times. It helps improve customer satisfaction and makes operations more reliable.
2. Simplifying the Overall Export/Import Process- ShiprocketX helps ease the challenges while exporting or importing online. This efficiency aids in cutting the time needed to transport goods to clients and generally increases the flow of operations. The streamlined processes tend to cut the administrative and logistical charges of cross-border trading.

Conclusion

A proforma invoice is a commonly used document in international business. It is the preliminary indication of the costs. The main functions of the proforma invoices are customs, shipping, and financing. Online sellers must be well-versed with proforma invoices, their format, and their legal status to avoid difficulties in shipping internationally. ShiprocketX can be a game-changer for customs clearance and overall business.