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What is a Tax Invoice? How to Create a Tax Invoice: The Step-By-Step Process

Published on: 14-04-2022

What is a tax invoice?

Invoices are the foundation of the recording and accounting of business activities. They are the documents that record the essential details of the transactions and help track the flow of funds and inventory in a business. They help a company identify what has been transacted, what is owed, and how much.

Most transactions in a business attract a tax levy. This tax amount has to be correctly calculated, accounted and listed in the paperwork that relates to the transaction. A tax invoice is a document that lists all of the taxes applied to the products or services that were supplied. It is evidence of the tax component of the transaction.

The answer to ‘what is a tax invoice’ may be altered according to the local laws. A tax invoice must include all the information that pertains to the transaction that has attracted the tax. This would include:

  • Date of transaction
  • Name of product or services
  • Quantity of the product or services
  • Mode of transportation or delivery
  • Price of each of the items that are sold
  • The tax applicable
  • Name and address of the supplier
  • Tax registration number
  • Name and address of the customer (optional in some cases) 
  • Why is a tax invoice created?

    Different countries and regions may be subjected to different tax regimes. Regardless of the number and amount of tax that is applicable, all transactions that attract tax must be taxed and the tax amount recorded. The tax invoice serves the seller to keep a record of the tax amount and for the purchaser to have the same document and claim input tax credit where applicable. The record of tax collected is an essential piece of information in the company’s accounting system. It also forms a part of the records that both the buyer and the seller would use to file their taxes and compile records to submit to the authorities. Some countries require the tax invoices to be issued and recorded for every taxable transaction to ensure no malpractice and tax evasion. A company may also record the tax invoices and submit them to the authorities at the end of the financial period to get tax relief.

    So, when a company is delivering goods, the tax invoice should be issued with complete details of the order and the tax. Some companies may issue a tax invoice when the purchaser makes the payment. The rules and laws of the region may also specify a fixed number of days after the transaction within which the tax invoice must be issued.

    Generally, the tax invoice for the sale of goods is generated as soon as the goods are delivered or at the time of payment. The tax invoice may be issued within 30 days of the delivery of services for services. If a bank or a financial institution performs the transaction that is attracting the tax, the tax invoice is generated within 45 days of the transaction.

  • What to include in a tax invoice?

    A tax invoice would have to list the complete details of the transaction that is being taxed. This would include:

  • The title ‘Tax Invoice’
  • Date of the invoice: This is very important as it tells the accountant or the person concerned which period the tax amount should be accounted for under
  • An invoice number: A unique invoice number is essential for easy tracking of the invoice. Each company may have a different invoice numbering system, but the number given to each tax invoice must be unique. In some countries, the sequence of the invoice number changes every financial year
  • The name, bill-to address, and the delivery address of the purchaser: The bill-to address may be the buyer's registered address while the location that is shipped to may differ from the billing address. Both the addresses must be clearly specified in the tax invoice
  • Bill from details: The seller's name and address of the registered location of the company are detailed here. This may be different from the ship-from address in a multi location company
  • Registration numbers: All the required registration numbers of the seller that relate to the tax invoice are listed. This may be the GST/ TIN or any other tax registration numbers of the company
  • Ship from details: A company that maintains its administration and logistics offices in different locations may have a different address than the actual goods are shipped from
  • A description of the goods and/or services that comprise the transaction
  • The value of the transaction without tax
  • The tax applied for each taxable item with the tax details
  • If the HSN code or Harmonized System of Nomenclature code is used in your geography for the systematic classification of goods. Services Accounting Code (SAC) may be listed to classify services. There are usually variations in the tax applicable for different codes.
  • The total value of each item including the tax
  • Any additional charges, discounts, or other financial details of the transaction
  • The total value of the invoice and the total tax value
  • Signature of an authorized signatory from the supplier
  • Terms and conditions: If there are any terms and conditions that are applicable for the transaction, they are listed on the tax invoice

How to create a tax invoice?

The tax invoice would have to be individually calculated and compiled into a document in a manual system. Some companies create a text document for the tax invoice but perform the data entry and the calculations manually.

Using an intelligent solution such as TallyPrime for business management automates the creation of the tax invoices. Since the entire system is automated, it accurately creates the invoice with all the required details instantly. The automation of tax invoicing helps process the paperwork for any transaction very quickly and effortlessly. All the relevant accounting and inventory records are also linked to and updated simultaneously.

TallyPrime automatically populates the tax invoice with all the required item details and computes the tax component of the transaction. It also automates the generation of tax filing statements and reports. In countries where digital submissions are required, the tax filing reports are generated automatically in real-time for filing purposes. TallyPrime also enables companies to avoid the physical dispatch of bills and invoices to buyers and instead use soft copies for business. This speeds up the transactions and makes the company more nimble and agile.

Is tax invoice a bill?

A bill is a simple document that gives the basic details of a transaction. It gives the seller’s information and may or may not include the full details of the discount or taxes that have been applied. A tax invoice, on the other hand, is a detailed document that is a legal payment instrument for the company. When the seller generates the tax invoice and issues it to the buyer, payment is expected in full. The tax invoice gives the complete details of the buyer as well as the seller. It emphasizes every detail that relates to the taxes applied to the transaction. It also enumerates the additional changes and discounts applied to the transaction. A tax invoice is a more vital document for payment as legal proof of the transaction.

Both a tax invoice and a bill are a demand for payment, But, a tax invoice is a more detailed and legally valid proof of the transaction as well as a record of the taxation component of the transaction. This is why it is vital to generate tax invoices that are complete and error-free to comply with the laws and regulations. A detailed tax break-up of every transaction is also helpful when filing taxes. It is rather difficult to extract the individual tax breakup of the transactions made in a manual system. TallyPrime generated tax invoices give a complete tax invoice report to submit to the buyer and maintain the detailed record of each tax head. So, when filing tax returns, a detailed report can be generated without extra effort or work.