Earning revenue is the primary objective of every business. There are different ways to achieve this, and to keep track of performance, businesses generally prepare two major financial statements: the balance sheet and the income statement.
In this context, the financial inflows generated by a business or government can be divided into two categories: capital receipts and revenue receipts. This article explains their meaning and the distinction between them.
What is a Capital Receipt?
Capital receipts arise from financial decisions that carry long-term consequences. These are not derived from routine business operations but occur occasionally. They usually involve selling assets or raising liabilities.
Since capital receipts are non-recurring in nature, neither businesses nor governments can treat them as regular income. In simple terms, they represent cash inflows from capital gains through the disposal of investments or assets such as property, land, or jewellery.
Because they stem from asset and liability transactions, capital receipts are recorded in the balance sheet rather than in the income statement or profit-and-loss account.
Purpose of Capital Receipts
The primary objective of capital receipts is to strengthen an organisation’s capacity to generate future income. They provide large sums of money within a short time, which can then be used for long-term investments or debt repayment, thereby improving financial stability.
For instance, the Government of India fixes annual disinvestment targets to mobilize funds and address the country’s fiscal deficit.
Capital Receipt: Taxable or Not
According to the Income Tax Department, capital receipts are generally exempt from tax unless specifically mentioned under the law.
Capital receipts become taxable only when they are linked to capital asset transactions, in which case capital gains tax applies. Capital gains refer to the profit earned when an asset is sold at a higher price than its purchase cost. Capital assets can include stocks, bonds, land, buildings, machinery, or other fixed assets.
Examples of Capital Receipts
There are multiple ways in which businesses and governments can generate capital receipts. Some common examples include:
1. Sale of Shares (IPO and Secondary Market):
When a company raises money by offering shares to the public for the first time through an Initial Public Offering (IPO), it generates capital receipts. Investors who buy these shares provide funds directly to the company. Later, when these shares are traded in the secondary market, investors may earn capital gains if they sell them at a higher price.
2. Sale of Assets:
Selling fixed assets such as land, property, machinery, patents, copyrights, or goodwill provides capital inflows. For governments, this also includes the disinvestment of Public Sector Undertakings (PSUs).
3. Borrowings (Loans and Debt Instruments):
Borrowing money through loans, bonds, or treasury bills creates capital receipts. Although these are recorded as liabilities on the balance sheet, they bring immediate inflows to finance projects or business expansion.
4. Small Savings Schemes:
For governments, collections from schemes like National Savings Certificates, Kisan Vikas Patra, Sukanya Samriddhi Yojana, and Post Office Deposits count as capital receipts since they create liabilities that must be repaid later.
5. Issue of Debentures and Bonds:
Companies and government entities issue debentures and bonds to raise long-term funds. While debentures are unsecured, their lower interest rates and extended repayment timelines make them a common funding option.
6. Insurance Claims:
If a business claims insurance for physical damage to equipment or other assets, the payout received is considered a capital receipt since it increases cash inflows.
7. Government Grants:
Funds or grants provided by the government for specific purposes such as infrastructure or research are also classified as capital receipts, especially when they are non-repayable.
What is a Revenue Receipt?
Revenue receipts are the earnings a company or government generates from its routine operations. Unlike capital receipts, they do not involve creating liabilities or selling assets. Instead, they stem from the goods and services offered in the market.
These inflows are recurring in nature as they arise from day-to-day business activities. For companies, revenue receipts appear in the income statement or profit-and-loss account.
To qualify as a revenue receipt, two conditions must be met:
- It must not reduce the company’s assets.
- It must not create any new liability.
Purpose of Revenue Receipts
Revenue receipts act as the core financial resource for any organisation. The fundamental aim of a business is to generate income, and revenue receipts fulfil this purpose on a daily basis.
For instance, when a company sells goods or services, it not only earns income but also contributes to expanding customer choices, creating jobs, and adding value to the overall economy.
The main benefits of revenue receipts are that they are recurring, liability-free, and asset-preserving, making them essential for both the growth and survival of a business.
Revenue Receipt: Taxable or Not
As per the Income Tax Act, 1961, all revenue receipts are taxable unless specifically exempted by law. This means that companies must include their revenue receipts as part of taxable income each year.
Examples of Revenue Receipts
Here are some common examples:
1. Sale of Products or Services:
The income earned by a company from regularly selling goods or providing services forms a major portion of its revenue receipts.
2. Tax Revenue (for Government):
Governments collect taxes that contribute to revenue receipts. These are classified into:
- Direct Taxes: Such as income tax, wealth tax, corporate tax, and capital gains tax.
- Indirect Taxes: Levied on goods and services, where the burden of tax may be shifted from sellers to consumers.
3. Non-Tax Revenue (for Government):
Includes income from fees, fines, penalties, loan interest, and dividends or profits from public sector undertakings (PSUs).
4. Discounts Received:
When a business secures trade discounts from suppliers, these are considered revenue receipts since they do not create liabilities.
5. Government Grants and Subsidies:
Regular subsidies or grants provided by the government to support ongoing operational needs.
6. Miscellaneous Income:
Other small or irregular inflows such as refunds, rebates, recovery of bad debts, or gains from currency exchange fluctuations.
Key Differences between Capital Receipts and Revenue Receipts
Having explored capital receipts and revenue receipts individually, it is important to understand how they differ:
Capital Receipts
- Arise from creating liabilities or selling assets.
- Recorded in the balance sheet.
- Non-recurring in nature.
- Typically not taxable, though capital gains tax may apply in certain cases.
- Cannot be used to create reserve funds within the business.
Revenue Receipts
- Earned from routine business operations, primarily through the sale of goods and services.
- Reflected in the profit-and-loss or income statement.
- Recurring in nature.
- Taxable under the Income Tax Act unless specifically exempted.
- Serve as a source for building reserves in the company.
Similarities between Capital Receipts and Revenue Receipts
Despite their differences, capital and revenue receipts share some common characteristics:
- Both represent sources of income for a business or government and help assess financial health.
- Funds from either category can be utilized to expand operations or business activities.
- Capital receipts generally result in the creation of new assets, such as borrowings, asset sales, or investments, whereas revenue receipts come from ongoing business operations, including sales, rent, discounts, and dividends.
FAQs on Capital Receipts and Revenue Receipts
Q1. Is a revenue stamp mandatory on rent receipts?
A revenue stamp is not required for rent payments below ₹5,000. For rent exceeding ₹5,000, affixing a revenue stamp is mandatory.
Q2. Is a capital receipt taxable?
According to the Income Tax Department, capital receipts are generally exempt from tax unless there is a specific provision under the law that taxes them.
Q3. Is a revenue receipt taxable?
Yes, revenue receipts are taxable unless a specific exemption is granted under the Income Tax Act.
Q4. What is the main purpose of capital receipts for businesses or governments?
Capital receipts are primarily used to raise funds for long-term investments, asset acquisition, or capital expenditures. They are not meant for day-to-day operational expenses but for strengthening the capital base.
Q5. Where are revenue receipts and expenditures recorded?
Revenue receipts are credited to the income account and appear on the credit side of the Income and Expenditure account.
Q6. What is the difference between a capital receipt and a revenue receipt?
- Revenue Receipt: Generated from regular business operations, like the sale of goods or services, and reflected in the income statement.
- Capital Receipt: Arises from the sale of assets, borrowings, or other transactions that create liabilities and are recorded in the balance sheet.
Q7. Can you give some examples of capital receipts?
Examples include:
- Selling shares to the public (IPO)
- Selling fixed assets like land, buildings, or machinery
- Issuing debentures or bonds
- Borrowing loans from banks or financial institutions
Q8. How to classify a receipt as a revenue or capital receipt?
- If a receipt creates a liability or reduces an asset, it is a capital receipt.
- If a receipt does not create a liability and does not reduce an asset, it is a revenue receipt.
Example:
- Corporation Tax: Revenue receipt, as it neither reduces assets nor creates liabilities.
- Loan from Japan for Metro Construction: Capital receipt, as it generates a liability.
Q9. Can a loan taken by the government be classified as a revenue receipt?
No, loans taken by the government are classified as capital receipts, since they fund long-term investments or infrastructure projects
Q10. Are dividends received considered revenue or capital receipts?
Dividends from investments are revenue receipts if received regularly as part of business operations.
Q11. Are gifts received by a business taxable?
Gifts received are generally considered capital receipts if they increase the capital of the business, but tax rules may apply depending on the nature and source of the gift.
Q12. Are interest receipts from loans taxable?
Yes, interest earned on loans is treated as a revenue receipt and is taxable under the Income Tax Act.
Q13. Can revenue receipts be used to repay capital liabilities?
Yes, revenue receipts can be allocated to repay capital liabilities, but they are primarily meant for covering operational expenses.
Q14. Is disinvestment by the government considered a capital or revenue receipt?
Disinvestment proceeds are capital receipts, as they involve the sale of government assets or stakes in public sector undertakings.
