What is a Tax Invoice – Invoicing Basics Made Clear

What is tax invoice

Confused between invoice and tax invoice? Well, both are legal documents and include similar information then how does a tax invoice differ from a regular invoice?

Just to explain in brief – A tax invoice is an invoice that contains the amount of tax payable, in addition to all standard invoice information. It shows the goods and services tax, commonly recognized as GST. It’s not just the evidence of goods and services supplied but also crucial for the tax-registered people to claim the input tax credit.

Topics like this certainly require detailed knowledge. To make this commercial document a bit more clear and understandable, let’s start with the basics!

What is a tax invoice?

A tax invoice is a legal document sent by a tax-registered dealer to another in order to claim the input tax credit. Any business registered for GST has to send a tax invoice for every taxable sale that takes place. This invoice shows the taxes applied to the goods and services.

A tax invoice acts as a summary invoice that is useful for reporting GST or HST on a monthly, quarterly or annually basis. The significance and purpose of tax invoices vary from country to country.

If you are not a tax-registered business then you may not charge GST and so there is no need to issue a tax invoice. You can simply send a standard invoice.

Difference between invoice and tax invoice

Both are legal documents that serve as proof of sale and notifies the buyer of the payment to be made. However, the tax invoice also offers an additional purpose. The major difference and additional information served by the tax invoice is that it includes Good and Service Tax (GST).

A tax invoice is issued by a tax registered business vendor or seller to another while supplying the goods or services whereas a standard invoice or a retail invoice is issued by the business vendor to the end customer during the sale.

If the tax invoice is crucial for claiming tax credits then a standard invoice is crucial for requesting payment from the customer against the goods and services that are provided.

No matter which type of invoice you use, it is essential as a business to maintain a complete record of the sales document.

Did you know that the invoicing requirements in the USA are relaxed compared to other countries? Though they do not have a single regulatory format, it’s important to include all vital information. Check this out!

What to include on a tax invoice?

If you are a GST registered business then your legitimate tax invoice should mandatorily include the following:

  • Unique tax invoice number
  • Tax invoice date
  • The term ‘tax invoice’ is clearly displayed on the invoice
  • Supplier’s/Business vendor’s name, address, and GST Identification Number (GSTIN)
  • Customer’s name and address
  • Customer’s GSTIN (if they are tax registered)
  • Description of goods and services (number, unit, quantity, price)
  • GST rate that is applicable
  • Total cost including taxes
  • Delivery address or shipping address
  • Supplier’s signature
Now you know what gets into a tax invoice but how to create one or where to use it? Get your answers here!

What is a tax invoice used for?

Tax invoices play a major role in the state’s tax system that provides you with the benefits of tax credits. For maintaining your business accounting process, it is essential to submit the relevant tax invoice after every financial year. Moreover, this is not just beneficial for business owners but also helps the government to prevent tax evasion.

How to create a tax invoice?

Usually, the template which you use for the regular invoice can be the same used for a tax invoice. Only some additional details as mentioned above should be added. You can either make a tax invoice using a word document or get it created by any online invoicing software. Here is what a typical tax invoice format include:

  • The term ‘Tax Invoice’ should be displayed as a header
  • Business details like the company logo, name, address, phone number, email id will appear on the right side of the header
  • On the left side of the header, customer’s information – name, address, phone number should be shown
  • On the right-hand side, add the invoice issued date, your unique invoice number, and also the invoice due date
  • The main body of the invoice should include the breakdown of products and services offered like quantity, description, and cost of each
  • Along with the total amount, also add the taxes applicable, delivery fees, and any other fees relevant
  • Make sure to make the grand total appear bold and easily visible
  • You can also include terms and conditions, payment method, and other necessary details on the tax invoice

When to send a tax invoice?

So, basically, there are several scenarios when one needs to send a tax invoice. Two of them are:

  • When a person is GST-registered one must be issued with a tax invoice. This would help them to understand the relevant details related to the transaction and would also help them to highlight the amount of GST charged.
  • Another case when a tax invoice is required to be issued is when a good is sold with an intention of being resold at a later date.

Depending upon the type of business you may not need to issue a tax invoice. For example, let’s consider some of the Canadian businesses that are exempted from paying tax (GST):

  • Financial services
  • Legal services
  • Daycare services
  • Medical and dental services
  • Food and beverage
  • Music classes
  • Donated goods
  • Residential accommodation at head lease
Do you think only vendors can issue tax invoices and not the receipts or the buyer? Then you must read the section below to know something uncommon!

What is a recipient-created tax invoice?

The tax invoice that is created by the receiver (buyer) of goods or services instead of the supplier is known as a recipient-created invoice. However, this type of invoice can be issued only when there is a written agreement between the supplier and the recipient.

Another crucial point to include in such a tax invoice is the term, ‘Recipient Created Tax Invoice’ instead of only ‘Tax Invoice’. It is also important for the recipients to have the original or copy of such tax invoices as it can serve for tax purposes.

The recipient created a tax invoice that should be issued by the recipient to the supplier within 28 days of the deal.

When to issue an RCTI?

In some special cases, the purchaser or buyer issues a tax invoice which is also referred to as RCTI. These are instances when a buyer can do that and those are:

  • When both supplier and buyer are GST registered.
  • When the parties agree on the point that the buyer would issue RCTI and the vendor won’t issue a tax invoice. And, the entire agreement would be agreed and approved in writing.
  • RCTI is issued when the agreement is current and effective.
  • RCTI can be issued only when the goods and services that are being under the agreement are of the type that can be invoiced as RCTI.

Why is a tax invoice necessary?

The main purpose of tax invoices as mentioned throughout the article is to help in tax credits. It is actually a mandatory document necessary for availing tax credits. Tax invoice plays a major role in the effective functioning of the GST system.

This invoice also determines that the goods and services should be provided within the taxable period. In the case of accounting, tax invoices help to provide financial relief while in government, it is necessary for preventing tax evasion. No matter what, the tax invoice should always be issued on time.

Simply learning what a tax invoice is, may not seem engaging. Let’s do a bit of research!

How to comply with the different tax invoices requirements depending on countries?

‘One size fits all’ does not work out for tax invoices as the requirements, format, and other parameters vary depending upon the country it is used in. Let’s take a few types and discuss them further!

European Union

E.U member countries charge VAT on goods and services sold including digital products as well. Therefore the invoice included the VAT number of both buyer and seller; the itemized VAT as per the country in which the customer is residing in; and the nature and type of services provided.

Australia

GST is needed to be charged by both foreign-based and Australia-based businesses doing business within Australia. Moreover, even if you are a foreign-based enterprise selling online goods to Australians, then you also need to charge GST for values more than AUD$1000.

Canada

Canada is another country that charges GST on certain sales and their invoicing requirements are:

  • Business name
  • Invoice date or the date on which the GST is payable or paid
  • The total amount paid or payable
  • The total amount of GST charged
  • Business registration number
  • Buyer’s business name
  • Brief description of goods or services
  • Term of payment
Singapore

Generally, all GST-registered customers are issued with a tax invoice in Singapore. These are utilized for claiming tax rebates or credits. These are only excluded for zero-rated supplies, exempt supplies, deemed supplies or non-GST registered customers.

If these seem confusing then you can restrict yourself from doing business only to these countries you are familiar with. Take help of invoicing software to excluded countries while putting the shipping address. These may seem tedious if you are working manually, hence automate your invoicing process to get the changes done seamlessly.

Do I need to send a tax invoice?

It all depends on if you are GST registered or not. If your business is GST registered, after the sale is made, you need to send your customer a tax invoice. If you aren’t GST registered, you can send a standard invoice to your customer. However, if the customer demands a tax invoice, then you can send an invoice simply stating that no GST is due on purchase or mention the GST amount as ‘0’.

I have customers abroad. Should I send a tax invoice or a regular invoice?

There is usually no need to add GST on invoices that you send to customers abroad. Since there is no tax involved, no need to issue a tax invoice. Instead, issue a regular invoice.

Is it a tax invoice receipt?

Though an invoice and a receipt are issued by a buyer to the customer, these are both different. Both documents consist of the same information, but the difference lies in the date of the issue. Invoice is issued before receiving payment and receipt is issued after receiving payment.
An invoice is generated to request payment after the sale of goods or after providing the services. While a receipt documents that the payment has been settled from the customer’s end.

Regular invoices or tax invoices, the invoicing process can be much easier and quick with online invoicing software. It calculates and automates most of the billing process and also saves a lot of time that you can otherwise invest in your business growth.

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