Purchase Order Process: Steps, GST-Ready Sample PO and Pay-or-Hold Rule

The purchase order process has seven steps: requisition, approval, PO issue, PO acceptance, goods receipt, invoice match and payment. Each step creates one record, and the next step starts only when that record exists. The flow is: Requisition → Approval → PO → PO acceptance → Goods receipt note → Invoice match → Payment.

Two acceptances matter. PO acceptance is the supplier agreeing to your order (step 4). Goods acceptance is you accepting what was delivered (step 5). The legal payment clock runs from goods acceptance, not from PO acceptance.

A GST-ready PO carries the buyer's and supplier's Goods and Services Tax Identification Numbers (GSTIN), an HSN or SAC code on each line, the GST rate, a payment term in days, and the supplier's acceptance. HSN (Harmonised System of Nomenclature) classifies goods; SAC (Services Accounting Code) classifies services.

Our recommendation is to carry the HSN or SAC on the PO so it can be matched to the invoice, where the code is mandatory: tax invoices need 4 digits up to ₹5 crore turnover and 6 digits above (CBIC Notification 78/2020-Central Tax, PIB).

Udyam registration is the government's registration for micro, small and medium enterprises (MSMEs). From 1 April 2025, an enterprise is micro with investment in plant and machinery or equipment up to ₹2.5 crore and turnover up to ₹10 crore. It is small with investment up to ₹25 crore and turnover up to ₹100 crore (Ministry of MSME notification S.O. 1364(E)).

A filled-in PO using these fields (names, GSTINs and Udyam number are dummy values; use the HSN and GST rate that apply to your goods):

PURCHASE ORDER
PO number: PO/2026-27/0001          PO date: 12 October 2026
Buyer:    Example Fabricators Pvt Ltd, Peenya, Bengaluru, Karnataka
          GSTIN 29AAAAA0000A1Z5
Supplier: Sample Fasteners LLP, Bengaluru, Karnataka
          GSTIN 29BBBBB1111B1Z5   Udyam UDYAM-KR-00-0000000, category: small
Place of supply: Karnataka (same state: CGST + SGST)

Line  Description                  HSN   Unit  Qty  Rate     Amount
1     Hex bolt M8 x 40 mm, zinc    7318  nos   500  ₹84.00   ₹42,000.00

Taxable value ₹42,000.00 | CGST 9% ₹3,780.00 | SGST 9% ₹3,780.00
PO total ₹49,560.00. Other charges: none (freight included in rate)
Delivery: 26 October 2026, buyer's Peenya stores
Payment term: 45 days from acceptance of the goods (or deemed acceptance)
Terms: Buyer pays only for goods received and accepted, at the PO rate.
       Quote the PO number on the delivery challan and the invoice.
PO acceptance: Supplier name / signature or email reference / date

A purchase order is the buyer's order. A delivery challan is the supplier's movement document, which lists goods sent and charges no GST. The GRN is the buyer's record of what arrived. A tax invoice is the supplier's demand for payment, with GST.

Payment is safe only when the invoice agrees with the PO on price and with the GRN on quantity.

No. Hold the invoice when its quantity exceeds the GRN quantity or its rate differs from the PO rate, and pay the undisputed amount. Matching the PO, the GRN and the invoice before paying is a three-way match. A credit note is the supplier's document that reduces an earlier invoice.

A worked example (constructed to show the method), using the sample PO above:

• PO: 500 units at ₹84.00 = ₹42,000, plus 18% GST of ₹7,560 = ₹49,560.
• GRN: 480 units received.
• Invoice: 500 units at ₹86.50 = ₹43,250, plus GST of ₹7,785 = ₹51,035.
• Undisputed amount: 480 × ₹84.00 = ₹40,320, plus GST of ₹7,257.60 = ₹47,577.60.
• Excess billed: ₹51,035 − ₹47,577.60 = ₹3,457.40, or 7.3% of the undisputed amount.

The excess has two causes. The 20 units not delivered account for ₹1,982.40 (20 × ₹84.00 = ₹1,680, plus GST of ₹302.40). The ₹2.50 price rise on 500 units accounts for ₹1,475 (₹1,250 plus GST of ₹225). Together they make ₹3,457.40.

Our recommended rule, which you can adapt to your own risk:

In the example, pay ₹47,577.60 before the due date and settle the ₹3,457.40 by credit note. For micro and small suppliers, interest under section 16 of the MSMED Act runs on any held amount later found due, so resolve disputes inside the payment term.

Pay within the period agreed in writing, which can never exceed 45 days from the day of acceptance or deemed acceptance of the goods. With no written agreement, the limit is 15 days (MSMED Act, 2006, section 15). Goods are deemed accepted if you do not object in writing within 15 days of delivery.

Section 43B(h) of the Income Tax Act applies from assessment year 2024-25 (financial year 2023-24 onward). Amounts owed to micro and small suppliers are deductible in the year of the expense only if paid within the 15 or 45 day limit. Otherwise the deduction is deferred to the year you actually pay (Income Tax Department, Finance Act 2023 highlights). Medium enterprises are outside this rule.

Late payment attracts compound interest with monthly rests at three times the bank rate (MSMED Act, section 16). The bank rate was set at 5.75% from 7 October 2026 (RBI Monetary Policy Statement, 5 to 7 October 2026), so as of October 2026 the interest rate is 17.25% a year. Use the bank rate in force when you pay.

Our illustration for ₹1,00,000 overdue at 17.25% a year, compounded monthly (17.25% ÷ 12 = 1.4375% a month, each month taken as 30 days):

Three habits follow:

• Record the supplier's Udyam category on every PO.
• State the payment term in days from goods acceptance. In our view, a PO the supplier accepts in writing is the simplest written agreement; confirm this with your chartered accountant.
• Object to a bad delivery in writing within 15 days.

The goods receipt note proves you received the goods, which is a condition for claiming input tax credit (ITC) under section 16(2)(b) of the Central Goods and Services Tax (CGST) Act, 2017. ITC is the GST you paid on purchases, which you set against the GST you owe on sales. When goods arrive in instalments, credit is available on receipt of the last lot.

Section 16(2) also requires a valid tax invoice, the invoice appearing in your GSTR-2B (the auto-drafted ITC statement the GST portal prepares from suppliers' returns), the supplier having paid the tax to the government, and your own return being filed. If you do not pay the supplier within 180 days of the invoice date, the credit must be added back to your tax liability with interest (CBIC, CGST Act section 16).

Record every partial delivery against its PO line on the day it arrives, not at month end.

A spreadsheet works while one person raises few POs for few suppliers. It stops working when POs, receipts and stock sit in different files, because nobody can see which POs are still open. We recommend software once more than one person receives goods or you buy for more than one warehouse.

Arka Inventory is cloud software built natively on Salesforce. This is how we run the process:

• Plan the purchase. You plan purchases and schedule purchase requisitions or POs from sales, stock levels and forecasts (forecasting and purchase automation). Set the trigger quantity with the reorder point formula.
• Receive against the PO. At receipt, you choose the supplier and see its outstanding POs, then select the products and adjust quantities to what arrived. Price fills in from the supplier's cost when we hold it (material inbound guide). Receiving is barcode-based, with pallet labels and bin putaway; our guide to managing warehouse inventory covers the routine around it.
• Cost it properly. Freight, duties, taxes and fees go into landed cost, so each unit carries its true cost. The landed cost calculation for imports into India gives the formula and a sheet.
• Get alerted. Inventory alerts tell you when stock arrives for backordered items and when items fall below minimum levels.
• Hand over to accounts. Our Tally integration passes invoices, bills and transaction details from Arka to Tally. We also integrate with QuickBooks Online.

As of October 2026, purchase orders are included in every plan. Basic costs $199 a month billed yearly with one user licence (extra users $42 a month), and Advance costs $499 a month billed yearly with two (extra users $52). Enterprise pricing is tailored to your team (pricing). For a wider view of what buyers pay, see inventory management software cost. You can try everything free for 15 days with no credit card, and standard setup guidance is included. Onboarding typically takes a minimum of two weeks, depending on your data.

To see your own purchase flow in the product, book a demo.