As a business owner, you know how tedious invoicing can be, but it is crucial as long as you want to run a business and drive sales. The invoicing process is not only for issuing invoices to clients but also for maintaining accurate invoice records because you are obliged to pay taxes. So, whenever you sell goods or provide services, you need to create a tax invoice and highlight the tax payable amount for the buyer.
No matter what’s tax amount is, you are responsible for keeping track of past invoices. If you have started your business and are not aware of how to create a tax invoice, here is our detailed blog to learn everything related to tax invoices. From the tax invoice creation process to its importance, we have included all the necessary information for small businesses.
What is a Tax Invoice?
A tax invoice is a detailed bill that includes taxes on goods or services. It’s used to record sales, calculate taxes, and meet tax compliance requirements. Tax invoice serves as proof of transaction for purchased goods, which are subject to VAT or GST taxes. It further helps the seller and the buyer to comply with tax regulations. Let us understand what is a tax invoice by using an example.
For example, if you want to create an invoice for $150 for goods sold to a customer, and a 15% sales tax is applied, the total outstanding amount in the tax invoice would be $172.50.
How to Create Tax Invoice?
Creating a valid tax invoice for your accounting purposes is a task that requires serious precision and is usually done through a fixed module. The following are the steps of how a sales tax invoice is generated:
- Log in to the Moon Invoice web app and enter the ‘invoices’ tab.
- Start creating a new invoice by clicking on the ‘+’ icon.
- Include details of the invoice, such as invoice date and number, due date, and currency.
- Enter client details such as the customer’s address, contact details, and phone number.
- Now, type business details like owner name, company name, and address. Also, you can upload your company’s logo.
- Add product details, including their quantity and rates
- Select the tax as per your company’s policy and the total amount will be adjusted automatically.
- Add payment terms if you wish to specify anything regarding payments.
- Save the invoice & customize the invoice templates from PDF & Print Settings.
- Lastly, send it to clients via WhatsApp or Email.
Types of Tax Invoices
Tax invoices can be of three types that you should know to make sure the transaction is properly documented before issuing it to the buyer.
1. Full Tax Invoice
An invoice involving comprehensive details such as product description, quantity, rates, and taxes applicable along with the seller and the buyer’s information is referred to as a full tax invoice. This type of invoice is usually created for international trade purposes.
2. Simplified Tax Invoice
Simplified tax invoices highlight only the important aspects of the invoice rather than showing the full invoicing details like full tax invoices. It is mainly used for small transactions where there is no need for a full tax invoice.
3. Electronic Tax Invoice
As its name suggests, the tax-compliant invoices that are sent and received electronically are said to be electronic tax invoices. These e-invoices provide a convenient way to deliver invoices without any need for physical meetings.
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What Should Be Included in a Tax Invoice?
Below are the most common things that you must include when creating a tax invoice.
1. Invoice Date
The date is critical because it notifies the accountant of when to account for the tax amount.
2. Invoice Number
A unique number is required for convenient tracking. Regardless of the company’s invoice numbering method, each tax invoice must be assigned a unique number.
3. The Buyer’s Details
To describe to whom the invoice is issued, mention the buyer’s details such as full name, residential address, phone number, city, and zip code.
4. Shipping Details
Enter the shipping address for product delivery from the warehouse to the customer’s location. Then, also need to add the billing address.
5. Transaction Details
It includes the value of each item and quantity, plus applicable taxes. You also need to calculate any additional prices or special offers associated with the transaction.
6. Payment Due Date
The total amount owed on the invoice, as well as the total sales taxes due to be paid by the customer.
7. The Issuer’s Signature
Once an invoice is created, you must authorize it by adding your signature or business stamp.
8. Terms and Conditions
Mention any terms and conditions regarding payments or if there are any penalties for late payers.
Is Tax Invoice Same as Receipt?
The answer is no — they both are different financial documents even though they consist of the same information. A tax invoice is generated once the goods are sold. It consists of transaction details such as rates, quantity, and payable tax amount, which play a vital role for both, the seller and buyer, to comply with tax laws. This financial document also helps the buyer to claim tax credits.
Whereas, receipt works as proof of payment made by the buyers. So, a receipt is only created once the buyer has paid the total amount for purchased goods. A receipt shows when the transaction was made and further confirms there are no pending dues.
The difference is that the tax invoice includes the products and services provided, as well as any discounts, and taxes. On the contrary, a receipt is handed over when the buyer makes a payment. It demonstrates that money was received and that the taxable trade was completed. It also acts as proof of ownership.
Importance of Tax Invoices for Businesses
Tax invoices are required to document the delivery of goods or services and other sorts of financial reporting. They are important for a variety of purposes other than accountancy.
Here’s why it is so important for your business:
- It is a necessary document when it comes to validating and supporting a tax credit claim submitted by a tax-registered customer, ensuring the claim is legitimate and can be processed in accordance with tax regulations.
- To clearly identify whether the goods or services provided in the transaction are subject to taxation for better tax compliance.
- To determine the payment deadline, allowing both the buyer and the seller to have a clear understanding of when the last date of the payment is.
- For the state’s tax system to recognize transactions and provide a tax identification or tax proof number.
- Tax invoices will help the relevant government agency prevent tax evasion.
- To compute tax charged correctly for a financial year and aid to claim tax relief from the government.
Tax invoice Example
The best tax invoice example is let’s assume you performed an AC installation service that costs $2,000. When generating a tax invoice, it will include the service description, the service charge, and applicable taxes. If the tax rate is 14% as GST (or sales tax), the tax payable would be $280.
Therefore, the total amount due from the customer would be $2,280, including the AC service charge and the tax. Once this tax invoice is generated, you should send it to the customer and retain a duplicate copy for your financial records.
This ensures that both you and the customer are clear on the service provided, the taxes applied, and the amount to be collected
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Now you can add taxes easily and automatically adjust the total payable amount while creating a tax invoice.
Conclusion
Every small or large business needs to keep track of tax invoices as they have to comply with tax regulations. This invoicing process is not only to fulfill your tax obligations but also to monitor the business’s cash flow and make informed decisions. Since you know the tax invoice meaning and have reviewed the aforementioned steps, you should now have a clear idea of how to create a tax invoice and the importance it holds for your business.
The choice between generating a tax invoice using software or doing it manually is entirely yours. However, we recommend taking benefit of our 7-day free trial to experience how effortless tax invoicing can be with Moon Invoice.
Don’t just let your business run as usual when it has the potential to grow. So, why wait? Start using Moon Invoice today to take your business to new heights.
FAQs
Jayanti Katariya is the founder & CEO of Moon Invoice, with over a decade of experience in developing SaaS products and the fintech industry. He holds a degree in engineering. Since 2011, Jayanti's expertise has helped thousands of businesses, from small startups to large enterprises, streamline invoicing, estimation, and accounting operations. His vision is to deliver top-tier financial solutions globally, ensuring efficient financial management for all business owners.
