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  • Noida Police Invoke Gangsters Act Against 33 in Multi-Crore GST Scam

    In a significant crackdown on financial crime, the Noida police have invoked the stringent Uttar Pradesh Gangsters and Anti-Social Activities (Prevention) Act against 33 individuals linked to a massive GST scam. This decisive action follows the arrest of 45 suspects involved in this elaborate scheme.

    The GST scam, which surfaced in June 2023, involves a substantial revenue loss to the government. Authorities uncovered that fraudulent input tax credits were claimed by numerous fake companies, which were created using forged documents. According to Deputy Commissioner of Police (Crime) Shakti Mohan Avasthy, the Gangsters Act has been applied to the GST fraud case registered at Sector 20 police station. This measure targets 33 individuals who have been formally charged under sections 2/3 of the Act.

    Further steps will include the attachment of properties belonging to the accused, as part of the ongoing investigation led by Avasthy. The probe has revealed the involvement of hundreds of fictitious firms, responsible for transactions amounting to approximately Rs 10,000 crore. Over two dozen arrests have been made to date, as per the officials spearheading the investigation.

    The police initially filed an FIR at the Sector 20 police station under several sections of the Indian Penal Code, including 420 (cheating), 467, 468, 471 (all related to forgery), and 120B (criminal conspiracy). The case first drew attention when fraudsters used the PAN details of a journalist to register fake companies in Punjab and Maharashtra, with an attempt to establish a third in Delhi being thwarted by GST authorities.

    This firm action by the Noida police demonstrates their commitment to tackling large-scale financial fraud and safeguarding the integrity of the tax system.

  • 5% or 18% GST on Baby Food Products

    The Rajasthan Authority for Advance Rulings (AAR) has determined that baby food products containing ingredients other than milk may be subject to an 18 percent Goods and Services Tax (GST). This contrasts with the 5 percent GST rate that applies to milk products. This ruling, which could set a precedent, came in response to an application from Bebymil, a Jaipur-based company, seeking clarification on the GST rate for its products sold under the brand name Momylac.

    Bebymil’s primary product is an infant milk formula, which not only includes milk but also cereals and protein supplements. These additional ingredients classify the product as a substitute for mother’s milk rather than a pure milk product.

    The GST rate for products is determined based on their Harmonized System of Nomenclature (HSN) codes. The AAR observed that Bebymil’s products fall under HSN code 1901. This code is designated for products that contain milk as an ingredient, not solely milk-based products, which are classified under HSN 0402. HSN 1901 incurs an 18 percent GST, while HSN 0402 incurs a 5 percent GST.

    Sandeep Sehgal, a partner at tax and consulting firm AKM Global, highlighted that the ingredient composition of any product is crucial in determining its correct classification and, consequently, the applicable GST rate. This ruling underscores the importance of understanding the specific HSN code classifications to ensure compliance with the appropriate GST rates.

  • Understanding Condonation of Delay in Indian GST Appeals

    Navigating the Indian GST framework can be challenging, especially for tax professionals tasked with filing appeals within strict deadlines. Despite best efforts, there are instances where appeals might be delayed beyond the initial three-month period allowed by law. In such cases, a request for condonation of delay becomes necessary.

    The legal landscape for condonation of delay in GST appeals is intricate and necessitates a detailed understanding of the relevant legal provisions and judicial precedents. Tax litigators must meticulously prepare to substantiate the reasons for delay, as the success of their appeal depends heavily on the acceptance of their condonation plea.

    Key case laws provide critical insights into how courts interpret and decide on these requests. For instance, the judiciary often considers whether the delay was due to circumstances beyond the control of the appellant and if there is a reasonable cause that justifies the delay. Legal experts must, therefore, present a compelling argument that aligns with these judicial expectations.

    In-depth technical knowledge of the GST law and a strategic approach are crucial in navigating the condonation of delay. Professionals must stay updated with the latest judicial pronouncements and ensure that their appeals and condonation requests are meticulously documented and robustly argued.

    By understanding the nuances of condonation of delay and leveraging relevant case laws, tax professionals can enhance their effectiveness in managing GST appeals. This proactive and informed approach not only improves the chances of success in appeals but also ensures compliance with the legal mandates of the GST framework.

    Legal Framework for Condonation of Delay in CGST Act

    The Central Goods and Services Tax (CGST) Act, 2017 sets a clear timeline for filing appeals. The statutory period to file an appeal is strictly 90 days from the date when the order is communicated. If you miss this window, the appellate authority does have the power to extend the deadline, but only by an additional month, provided there is a valid reason. This means that you essentially have a maximum of 120 days to file an appeal if you can demonstrate sufficient cause for the delay.

    However, beyond these 120 days, the CGST Act does not offer any provision for further condonation of delay. This lack of flexibility has resulted in significant legal challenges. Courts have had to interpret these limitations, often leading to complex judicial decisions. As a result, taxpayers and legal practitioners must be extremely diligent in adhering to these timelines to avoid losing their right to appeal due to procedural delays.

    Understanding this framework is crucial for anyone dealing with GST-related appeals. By recognizing the strict deadlines and the limited scope for extensions, you can better navigate the legal landscape and ensure compliance with the statutory requirements of the CGST Act.

    Judicial Precedents Supporting Condonation of Delay

    Numerous High Courts have examined the matter of condonation of delay in GST appeals. They have frequently drawn on the principles of justice and fairness to prevent appellants from facing excessive penalties due to procedural mistakes.

    In various rulings, these courts have emphasized that strict adherence to deadlines should not override the pursuit of substantial justice. The courts have highlighted that a balanced approach is necessary, where the merits of the case are given due consideration rather than focusing solely on procedural compliance.

    The judiciary’s stance is rooted in the belief that fair play and equity should guide the interpretation of laws governing GST appeals. By adopting a compassionate view, the courts aim to ensure that minor lapses do not obstruct the delivery of justice. This approach helps maintain trust in the legal system, showing that it is flexible enough to accommodate genuine delays while still upholding the law.

    01. Calcutta High Court on Arvind Gupta (04-Jan-2024)

    In the matter of Arvind Gupta, the Calcutta High Court underscored the appellate authority’s inherent power to condone delays beyond the statutory limit when justified by the circumstances. The court deemed the appellate authority’s refusal to extend the delay period beyond four months as flawed, ordering a reevaluation of the appeal based on its merits. This ruling highlights the judiciary’s commitment to prioritizing substantial justice over strict procedural constraints.

    S.K. Chakraborthy & Sons

    The court ruled that Section 107 of the CGST Act does not preclude the application of Section 5 of the Limitation Act, 1963. Thus, the appellate authority is permitted to consider delay condonation beyond the specified period, harmonizing GST law with the broader justice principles outlined in the Limitation Act.

    Kajal Dutta (2023)

    In this instance, the appeal was delayed due to the appellant’s illness, corroborated by a doctor’s certificate. The court accepted the delay, reaffirming that genuine medical emergencies are valid grounds for delay.

    02. Andhra Pradesh High Court Decision on Shaik Abdul Azzez (09-Jan-2024)

    In a significant ruling, the Andhra Pradesh High Court addressed the issue of delay condonation under Section 107 of the APGST Act. The court acknowledged that while the appellate authority lacks the power to extend delays beyond the statutory limit, there are exceptional circumstances that necessitate judicial intervention. In exercising its writ jurisdiction, the court chose to condone the delay, emphasizing that procedural rules should not obstruct the fundamental right to a fair hearing.

    Abiswathika Infra Case (2023)

    In the matter concerning Abiswathika Infra, the court dealt with the cancellation of the petitioner’s GST registration. Due to the absence of the GST Tribunal, the High Court directed a reconsideration of the case. This decision underscored the necessity for procedural flexibility when appellate forums are not readily available, implicitly affirming the need for judicial adaptability in ensuring justice.

    03. Madras High Court on Sathya Furnitures (2023)

    In 2023, the Madras High Court addressed a pivotal case involving Sathya Furnitures. The court decided to forgive a one-week delay caused by an accountant’s mistake, emphasizing that taxpayers should not bear the brunt of their representatives’ errors. This ruling reflects a broader judicial trend prioritizing fairness and justice over rigid procedural adherence. By focusing on the equitable treatment of taxpayers, the court reinforced the importance of addressing each case’s unique circumstances to ensure just outcomes.

    Great Heights Developers LLP (2024)

    In 2024, the court showed leniency in another significant case involving Great Heights Developers LLP. Here, the appellant managed to demonstrate valid mitigating circumstances, including a severe medical condition. The court’s decision to condone the delay underscores the principle that genuine hardships warrant consideration to uphold a fair adjudication process. This case highlights the judiciary’s commitment to accommodating real-life challenges faced by individuals, ensuring that the pursuit of justice remains compassionate and equitable.

    04. Analysis of Himachal Pradesh High Court’s Stand on Procedural Delays in Sunil Kumar Case (2022)

    In a significant ruling, the Himachal Pradesh High Court addressed the issue of procedural delays in the Sunil Kumar case (2022). The court criticized the rejection of an appeal due to a one-day delay, describing the decision as overly technical. This case underscores the judiciary’s disapproval of strict interpretations of procedural rules that can obstruct the delivery of justice. It serves as a reminder that the primary goal of the legal system is to ensure fair and equitable outcomes, rather than to rigidly adhere to technicalities. The court’s stance promotes a more flexible and just approach, emphasizing the importance of substance over form in judicial proceedings.

    05. Allahabad High Court Decision on Ramji Kirana Store (2023)

    In a landmark ruling in 2023, the Allahabad High Court addressed the procedural shortcomings in the case of Ramji Kirana Store. The court ruled that assessment orders issued without giving the assessee a chance to be heard, and appellate orders that dismissed delay condonation applications without proper consideration, are fundamentally flawed and cannot stand. This decision underscored the critical importance of ensuring due process and fair hearings in the adjudication of such cases. The court remanded the case for a fresh hearing, reiterating that all parties must be given an equitable opportunity to present their arguments.

    Discussion

    In our analysis of recent case laws, a clear judicial trend emerges: courts are increasingly accommodating delays in GST appeals when there are genuine and sufficient reasons. This trend aligns with the principles of the Limitation Act, 1963, which permits the condonation of delays if the appellant can show a bona fide reason for the delay.

    Section 5 of the Limitation Act, 1963, is particularly influential in this context. It grants courts the discretion to condone delays if “sufficient cause” is demonstrated. Various High Courts have effectively integrated this principle into the GST framework, even though the timelines stipulated by the CGST Act appear rigid.

    Additionally, courts have upheld the doctrine of substantial justice. This doctrine emphasizes that procedural lapses should not override the fundamental right to a fair hearing. It ensures that appellants are not unfairly deprived of their statutory right to appeal due to unavoidable delays.

    Key Takeaways:

    1. Judicial Flexibility: Courts are flexible with GST appeal deadlines when justified reasons are presented.
    2. Limitation Act, 1963: Section 5 is pivotal, allowing courts to condone delays based on sufficient cause.
    3. Substantial Justice: Emphasizes fair hearings over procedural technicalities, protecting appellants’ rights.

    Let’s Dive Deeper:

    • GST Appeal Delays: Have you faced delays in your GST appeals? Understanding this judicial trend can provide valuable insights for navigating such situations.
    • Limitation Act Principles: Are you aware of how Section 5 of the Limitation Act can work in your favor? Knowing this can significantly impact your appeal strategy.
    • Ensuring Fair Hearings: Do you feel procedural rules have compromised your right to a fair hearing? The doctrine of substantial justice ensures that your appeal is heard on its merits, not dismissed on technical grounds.

    By comprehending these judicial tendencies and legal principles, you can better prepare and argue your case in GST appeals. Always remember, the courts aim to ensure fairness and justice, even if it means overlooking procedural delays for genuine reasons.

    Conclusion

    Understanding the law around condonation of delay in GST appeals is key for tax litigators. Courts strive to balance the importance of following procedural timelines with the need to deliver fair justice. To advocate effectively for delay condonation, tax litigators must be well-versed in judicial precedents and the principles behind them.

    When the deadline for filing an appeal nears, it’s crucial to act promptly. If delays occur, be ready with strong legal and factual arguments to support your request for condonation. This preparation ensures that justice is pursued without sacrificing procedural integrity.

    Are you prepared for the approaching deadlines? Do you have the arguments needed to substantiate your delay condonation requests? Knowing the law and being ready with robust arguments can make a significant difference in your advocacy efforts.

  • GST Probe wing widens scrutiny of Pharma Companies

    The Directorate General of GST Intelligence (DGGI) is ramping up its investigation into potential tax evasion within the pharmaceutical sector. Notices have been issued, and many more are expected, targeting companies suspected of underpaying GST. The focus includes GST on brand transfer sales, fraudulent input tax credit (ITC) claims on expired drugs, business support services, and non-payment under the reverse charge mechanism. The anticipated combined tax liability is around Rs 1,000 crore, with Rs 450-500 crore already recovered from pharmaceutical companies.

    The DGGI has sent these notices to major pharmaceutical firms, including Sun Pharma, Mankind Pharma, Zydus Healthcare, and Cipla. These companies have yet to respond to inquiries. A central issue identified in the notices is the reversal of ITC for expired drugs. When stockists return unsold expired medicines, the pharma companies write off these products. The GST authorities contend that the ITC on raw materials used for these written-off drugs should be reversed, explained Siddharth Surana, Director at RSM India.

    Pharmaceutical companies are scrutinizing the legality of these notices and have approached the government for clarification. Non-compliance with GST demands could lead to legal actions, including fines and penalties. Companies are expected to contest these claims in court, presenting evidence to substantiate that their expenses are legitimate business operations.

    Ankur Gupta, practice leader in indirect tax at SW India, noted that legal proceedings will allow companies to argue that promotional activities and related expenses are crucial for business operations and market expansion, thus qualifying for ITC. However, GST authorities may interpret these transactions strictly according to the law, rather than considering the business context. Jignesh Ghelani, Partner at Economic Laws Practice, emphasized that expenses for sales and promotion are typically incurred for business advancement and should be eligible for ITC. The current disallowance is largely based on compliance with the Indian Medical Council Regulations and the Uniform Code for Pharmaceutical Marketing Practices, 2024.

    Experts stress that clarity on these issues is crucial to avoid significant litigation involving tax, interest, and penalties for pharmaceutical companies.

  • Early GST Recovery— New CBIC Instructions for Enhanced Compliance

    The Central Board of Indirect Taxes and Customs (CBIC) has issued new instructions to expedite the recovery of GST dues. This initiative aims to ensure prompt tax compliance while maintaining a fair and transparent system.

    Key Points of the New GST Recovery Instructions

    Authority for Early Recovery

    Typically, recovery proceedings are initiated by the jurisdictional Deputy or Assistant Commissioner of Central Tax. However, the CBIC now empowers Principal Commissioners or Commissioners to direct early recovery of GST dues, even before the standard three-month period following a demand order.

    Standard Recovery Procedure

    Under the GST law, if a taxable person fails to pay the specified amount within three months of receiving a demand order, the tax officer can initiate recovery proceedings only after this period has expired. This provision ensures taxpayers have adequate time to comply.

    Exceptional Cases for Early Recovery

    In exceptional circumstances, where revenue interests are at risk, a proper officer may require payment within a shorter period. This can only be done if the reasons are documented in writing, justifying the need for early recovery.

    Ensuring Uniformity and Compliance

    The CBIC has noted that some field formations have prematurely initiated recovery without proper justification. To address this, the CBIC has issued clear guidelines to ensure uniform implementation across all jurisdictions. The instructions mandate that:

    1. Proper Documentation: Any early recovery request must be accompanied by written reasons justifying the need.
    2. Approval Process: The jurisdictional Deputy or Assistant Commissioner must present these reasons to the Principal Commissioner or Commissioner.
    3. Official Directions: If satisfied, the Principal Commissioner or Commissioner will document the reasons and issue formal directions to the concerned taxable person for early payment.

    Enhancing Transparency and Predictability

    Rajat Mohan, Executive Director at Moore Singhi, emphasizes that these instructions strike a balance between safeguarding revenue and maintaining ease of doing business. By mandating clear guidelines and proper documentation, the instructions enhance transparency and predictability in tax administration.

    Mohan also suggests that state tax administrations should adopt similar instructions to address challenges faced by taxpayers under state jurisdictions. A coordinated approach would streamline tax compliance and foster a fairer tax environment nationwide.

    Conclusion

    The CBIC’s new instructions for early GST recovery aim to streamline the tax process, ensuring timely compliance and protecting revenue interests. By setting clear guidelines and requiring proper documentation, these measures enhance transparency and predictability, benefiting both the tax administration and taxpayers.

  • GST Collection in May 2024— Indicators of a Stable Economy

    The Finance Ministry reported that GST collections in May 2024 stood at ₹1.73 lakh crore. Although this figure is lower than April’s ₹2.10 lakh crore, it surpasses the ₹1.57 lakh crore collected in May of the previous year. This suggests stable economic growth and a robust GST framework.

    Key Insights into GST Collection

    The May collection reflects the consumption of goods and services in April. Experts believe that the average GST collection of ₹1.7 lakh crore is becoming the “new normal,” compared to ₹1.6 lakh crore in FY24.

    The gross GST collections for FY25 until May reached ₹3.83 lakh crore, marking an 11.3% year-on-year growth. This growth is driven by a significant 14.2% increase in domestic transactions and a modest 1.4% rise in imports. After accounting for refunds, the net GST revenue stands at ₹3.36 lakh crore, showing an 11.6% increase compared to the same period last year.

    Expert Opinions

    According to MS Mani, Partner at Deloitte, the steady GST collections align with recent GDP estimates, indicating a resilient economy. Despite challenges like the election season and heatwave, the GST system has shown maturity and stability.

    Saurabh Agarwal, Partner at EY, noted increased GST collections from developing regions such as Jammu & Kashmir, Manipur, Puducherry, and Arunachal Pradesh, suggesting growing consumption and broader economic progress. He also pointed out that higher collections in northern states like Delhi and Uttar Pradesh could be linked to election spending and increased purchases of cooling appliances due to high temperatures.

    Vivek Jalan, Partner at Tax Connect Advisory Services, highlighted that the first two months of FY25 were election months. Despite this, domestic collections saw a 14% increase, attributed to the time-barring period for issuing notices for FY 2019-20 and partial admissions of issues by taxpayers. Recovery actions taken by GST departments also contributed to high collections.

    Future Outlook

    Looking ahead, MS Mani expressed confidence in moving forward with the next stage of GST reforms, anticipating minimal revenue impact from these changes. However, Saurabh Agarwal cautioned that a combination of the summer heatwave and lower auto sales might result in flat or lower GST collections in June 2024 compared to April’s peak. He also noted that the establishment of GST Tribunals later this year might affect collections in the fourth quarter and beyond.

    Conclusion

    The GST collection figures for May 2024 indicate a stable and resilient economy, with consistent growth in domestic transactions. While there are potential challenges ahead, the overall outlook remains positive, supported by robust compliance and effective recovery actions. As the GST system continues to mature, businesses can expect a more streamlined and predictable tax environment.

  • Relief for Fertilizer Companies—GST Council Set to Approve Refunds

    Key Update— GST Council Circular

    The GST Council is set to provide much-needed relief to fertilizer companies by recommending the issuance of a circular to release refunds owed due to the inverted duty structure and subsidies. This move is anticipated to follow the upcoming general elections.

    Understanding Inverted Duty Structure (IDS)

    The inverted duty structure refers to the scenario where the tax rate on inputs is higher than that on outputs. For fertilizers, the GST rate is 5%, while essential inputs like ammonia (used in P&K fertilizer production) and packaging materials attract an 18% GST. This discrepancy leads to an accumulation of input tax credit, warranting refunds.

    Subsidy Mechanisms

    Fertilizer subsidies are governed by distinct policies:

    • Urea Subsidy: Urea is sold to farmers at a government-notified Maximum Retail Price (MRP) of ₹242 per 45kg bag (excluding neem coating and applicable taxes). The government compensates the difference between the delivered cost at the farm gate and the net market realization by manufacturers/importers under the Nutrient Based Subsidy Policy.
    • P&K Fertilizers: Subsidies for Phosphatic and Potassic (P&K) fertilizers are fixed periodically based on nutrient content. The market-driven MRP is set by fertilizer companies and monitored by the government.

    GST Impact on Fertilizer Inputs

    The 5% GST rate on fertilizers contrasts with the 18% GST on key inputs like ammonia and phosphoric acid, resulting in significant unutilized input tax credits. The Fertilizer Association of India (FAI) notes that under GST, government subsidies are excluded from the value of supply, meaning output GST applies only to the subsidized value. This leads to lower output GST in absolute terms compared to input GST credit, particularly for P&K fertilizers.

    Legal Disputes and Industry Challenges

    Fertilizer companies face accumulated input tax credits due to the subsidized value of outward supplies being lower than inward supplies and the higher GST rate on repackaging materials. Despite regulations allowing inverted duty refunds, inconsistencies in claims approval have led to legal disputes. The GST authorities have challenged these claims, particularly those involving government subsidies, resulting in multiple court cases and increased working capital burdens.

    Expert Insights

    Saurabh Agarwal, Tax Partner at EY, highlights the need for clarity and consistency in handling inverted duty refunds within the fertilizer sector. He asserts that the accumulation of input tax credits is not due to supplier or customer errors, and uniformity in refund processing is crucial for efficient working capital flow, ultimately benefiting businesses and consumers.

    Conclusion

    The anticipated GST Council circular for releasing refunds due to the inverted duty structure and subsidies is a significant step toward alleviating the financial strain on fertilizer companies. By addressing legal disputes and ensuring a consistent approach, this move promises to enhance the sector’s operational efficiency and support the broader agricultural community.

  • Litigation Management under 🇮🇳 GST—Part 01

    Section 75 of the Central Goods and Services Tax (CGST) Act, 2017, delineates the foundational principles governing adjudication within the GST framework. This section underscores the procedural norms to be meticulously followed by officers executing adjudication under Sections 73 and 74, or any other GST-related provisions.

    The adjudicative role of departmental officers, who act as quasi-judicial authorities, is laden with significant responsibility. It mandates a scrupulous, unbiased application of the law, ensuring decisions are rooted in a thorough understanding of the case facts, relevant sections, rules, and notifications.

    A pivotal aspect of adjudication is the issuance and response to Show Cause Notices (SCNs). Crafting a compelling reply to an SCN demands adept drafting and interpretive skills. Here are critical considerations for managing and responding to SCNs effectively:

    Navigating Show Cause Notices (SCNs) and Crafting Replies

    Avoidance of SCNs can occur under two primary circumstances. Firstly, if the scrutiny, audit, or investigation that precipitated the SCN is managed to the officer’s satisfaction, the notice may be circumvented. Secondly, engaging in pre-SCN consultations and addressing concerns convincingly can prevent escalation to the SCN stage.

    Upon receiving an SCN, ensure its completeness by verifying the inclusion of all annexures and relied-upon documents (RUDs) as referenced. A thorough reading of the SCN is imperative before drafting any reply, ensuring comprehensive understanding of the allegations.

    Replying to an SCN is indispensable. The taxpayer must respond to seek any potential relief. The SCN will specify a deadline for the response, and it is crucial to adhere to this timeframe. If the SCN issuing authority differs from the adjudicating authority, confirm that the reply is directed to the correct entity.

    Typically, SCNs provide a 30-day window for responses. If this period is insufficient, request an extension, providing a legitimate reason in writing. While extensions are generally granted, avoid repeated requests as they may be denied.

    Failure to reply within the stipulated time may lead the officer to proceed with adjudication. However, a response can still be submitted on the hearing date if not done earlier.

    When drafting a reply, ensure it is exhaustive and addresses all allegations and demands comprehensively. Support your arguments with relevant documents such as agreements, invoices, and other evidentiary materials. Reference all RUDs where necessary and express the desire for a personal hearing.

    Ensure the reply is meticulously organized, indexed, page-numbered, paragraphed, and submitted with proper acknowledgment or via registered post. It should be dated and signed, reflecting a professional and assertive approach.

    By adhering to these expert guidelines, taxpayers can navigate the complexities of GST adjudication with confidence, ensuring their responses to SCNs are robust, comprehensive, and persuasive.

  • Unveiling the Secrets of Proforma Invoices—Under GST

    Understanding a Proforma Invoice

    A Proforma Invoice is a document that outlines the details of goods or services that are yet to be delivered to a customer. Much like a regular invoice, it includes information about the prices and quantities of the items, applicable taxes, and any additional charges such as delivery fees. The term “pro forma” originates from Latin, meaning “for the sake of form” or “as a matter of form.” This type of invoice is typically used to provide an estimated cost to the buyer before the final sale is completed, ensuring transparency and helping in the planning of financial transactions.

    Why Are Proforma Invoices Issued?

    Proforma invoices are issued before the final invoice to inform buyers about the price, quantity, additional charges, and terms and conditions of the goods or services they intend to purchase. This advance notice allows buyers to review and raise any objections or concerns before the final invoice is issued, thus avoiding the need for revisions later. Additionally, in some business practices, particularly in vehicle showrooms, the final invoice is issued only after receiving payment. In such cases, a proforma invoice serves as a preliminary document for the buyer to make the payment, upon which the final invoice is generated. This process ensures clarity and transparency in financial transactions.

    Status Under GST and Other Laws

    A proforma invoice is not an actual invoice and, therefore, is not a legal document under the GST Act. The GST Act does not recognize the term “proforma invoice,” and it is not required to be reported in any GST returns by either the buyer or the seller. Consequently, the seller is not obligated to pay GST on proforma invoices issued.

    To avoid confusion, a proforma invoice should be clearly labeled as “Proforma Invoice.” If it is mistakenly labeled as a “Sales Invoice,” it could be treated as a legal document under GST, which would require compliance with GST regulations.

    Since a proforma invoice is not a sales bill, it is not recorded in the accounting records of either the seller or the buyer. Many billing software systems offer the functionality to create proforma invoices, quotations, sales orders, and purchase orders, but these documents are not reflected in the party’s ledger. This practice ensures that proforma invoices remain distinct from official financial documents and transactions.

    Format of a Proforma Invoice

    There is no specific format mandated for a proforma invoice. You can use your existing sales bill format but ensure to change the heading to “Proforma Invoice.”

    A well-structured proforma invoice typically includes the following information:

    1. Unique number.
    2. Date of issue.
    3. Supplier’s address.
    4. Prospective buyer’s address.
    5. Description of goods and/or services, including unit costs and line-item totals.
    6. Validity period of the proforma invoice.
    7. Proposed terms of sale.
    8. Proposed terms of payment, if applicable.
    9. Supplier’s bank details.
    10. Certifications required by customs authorities, if any.
    11. Signature of an authorized person from the supplier’s company.

    Including these details ensures clarity and transparency, making the proforma invoice a useful preliminary document for both parties involved.

    What Is the Difference Between an Invoice and a Proforma Invoice?

    An invoice is issued when a sale is made, while a proforma invoice is a preliminary document outlining the particulars of goods or services yet to be delivered. A proforma invoice is issued before the final invoice to inform buyers about the price, quantity, additional charges, and terms and conditions. This allows buyers to review the details and raise any objections before the final invoice is issued, preventing the need for revisions.

    While both documents are important, the invoice holds more legal significance, especially in import and export transactions. Unlike an invoice, a proforma invoice does not create any binding obligation on the client since it is not a legal document. Let’s delve into the key differences between the two:

    Definition:
    An invoice is a legal commercial document sent to the purchaser confirming that a sale has occurred and payment is due. A proforma invoice, on the other hand, is an estimate or quote sent before delivery, detailing the goods or services and their costs.

    Issue Time:
    An invoice is issued after the delivery of the product or service but before the payment is made. In contrast, a proforma invoice is issued before delivery or even before order placement.

    Purpose:
    The purpose of an invoice is to inform the purchaser that payment is due for the goods or services provided. It is legally binding. A proforma invoice, however, is not legally binding; it serves to inform the purchaser of what is expected, allowing for any necessary adjustments before the final invoice.

    Format:
    An invoice includes comprehensive information such as the company logo, billing addresses, contact details, billing information, and terms and conditions. A proforma invoice contains the same details but is clearly labeled “Proforma Invoice” at the top.

    Accounting:
    Proforma invoices are not required for accounting purposes as they merely provide an estimate. They are used to give the client an idea of the amount due and the payment date. Invoices, however, should be kept for reference, properly filed, and used for accounting and audit purposes. They are recorded to track amounts receivable or payable from clients.

    How Is a Proforma Invoice Different From a Quotation?

    A proforma invoice and a quotation serve different purposes in the sales process. A proforma invoice is typically provided at the final stage of a sale, while a quotation is given at the beginning.

    A quotation is an initial document provided to a potential buyer, outlining the estimated costs of goods or services. It usually lacks detailed specifics such as the quantity of goods, bank details, and exact additional expenses. Instead, it often states that taxes and shipping costs are extra and will be calculated later.

    In contrast, a proforma invoice is more detailed and is issued once the buyer has agreed to the terms but before the final invoice is generated. It includes precise information about the quantity of goods, applicable taxes, shipping costs, and bank details. This allows the buyer to have a clear understanding of the total costs and terms, ensuring transparency and reducing the likelihood of disputes.

    What’s the Difference Between a Proforma Invoice and a Purchase Order?

    At first glance, a proforma invoice and a purchase order may seem similar since both documents include details like descriptions, quantities, prices, discounts, and payment terms. However, they serve different purposes and originate from different parties.

    A proforma invoice is prepared and sent by the seller to the buyer. It outlines the agreed-upon details of the sale before the actual invoice is issued. This document helps the buyer understand the total costs, including any taxes and shipping fees, before finalizing the transaction.

    In contrast, a purchase order is created and issued by the buyer to the seller. It acts as an official request for goods or services, specifying the terms and conditions of the purchase. Once the seller accepts the purchase order, it becomes a binding contract. The buyer uses the purchase order to match with the received invoice when processing payment, ensuring all agreed terms are met.

    Understanding these differences is crucial for smooth transactions and accurate financial records, as each document plays a unique role in the procurement and sales processes.

    What Are General Terms and Conditions in Pro Forma Invoices?

    Pro forma invoices should clearly outline the terms and conditions of the sale, similar to regular invoices. Key elements to include are payment terms, warranty terms, installation or delivery conditions, and details about after-sales services. For instance, if the warranty is provided by a third party rather than the seller, this should be specified.

    For example, in the case of electronic items like mobile phones, after-sales service is typically handled by the company’s service center rather than the seller. Including this information ensures transparency and helps avoid confusion, making the transaction process smoother for both parties.

    By detailing these terms, pro forma invoices help set clear expectations and provide a comprehensive overview of the transaction, facilitating better communication and understanding between the buyer and seller.

    FAQs

    What is a Pro Forma Invoice?
    A pro forma invoice is a preliminary bill issued before the final invoice. It informs the buyer about the price, quantity, additional charges, and terms and conditions. This allows the buyer to review the details and raise any objections before the final invoice is issued, avoiding the need for revisions or cancellations.

    What is the Difference Between a Pro Forma Invoice and an Invoice?
    An invoice is issued after a sale is made, detailing the final amount due for goods or services delivered. In contrast, a pro forma invoice is issued before the sale is completed. It provides an estimated cost breakdown, including prices, quantities, additional charges, and sales terms, helping the buyer understand the transaction before it is finalized.

    What is the Format of a Pro Forma Invoice Under GST?
    Pro forma invoices fall outside the scope of GST, meaning GST is not payable when issuing a pro forma invoice. There is no prescribed format for pro forma invoices under GST laws. Businesses can format them similarly to regular invoices but must clearly label them as “Pro Forma Invoice” to distinguish them from final invoices.

  • Proper GST Billing Practices for Services from Registered Suppliers

    Question:

    Please help me understand the correct procedure under GST for receiving a service bill without GST from a registered supplier. We recently received a bill for office wall painting services from a supplier who has a GST registration number, which is mentioned on the bill, but the bill does not include the GST tax value. Should the bill include GST, and what are the potential consequences if we accept a bill without GST?

    Answer:

    It is permissible to accept a bill without GST if the goods or services provided are exempt from GST or if the supplier is not registered under GST. However, if the supplier is registered under GST, they are obligated to collect GST and issue a proper tax invoice. This ensures compliance with GST regulations and helps maintain accurate financial records. Understanding these requirements is crucial for avoiding potential penalties and ensuring seamless business operations.