Capital Receipts and Revenue Receipts: Meaning, Difference and Examples

Making money is a business's most important goal. There are several approaches to achieving this goal. Usually, a business maintains two important financial statements to track its financial journey: balance sheets and income statements.

In line with this distinction, there are two different types of receipts that a business or a government generates during its financial activities. They are called capital receipts and revenue receipts. You can read this blog to learn about the meaning and differences between these two terms. Read along. 

What is a Capital Receipt?

Capital receipts are the result of decisions with long-term implications. They are receipts received occasionally not from the day-to-day business activities of a company. Most commonly, they involve selling one's assets or creating liabilities. 

Capital receipts are generally non-recurring, and a business or a government can't record it as their regular source of income. In other words, they are cash inflows from capital gains generated from the sale of investments or assets like buildings, land, or jewellery. 

As capital receipts are the result of transactions of assets and liabilities, they are part of the balance sheet. They are not reflected in the income or profit-and-loss statement.

Purpose of Capital Receipt

The main goal of capital receipts is to increase an enterprise's revenue-generating ability. This can lead to a significant inflow of cash in a short period, which can be used for long-term investments or paying off debts, thus enhancing the financial viability of an enterprise.

For example, the Government of India sets yearly disinvestment targets as a means to raise revenue and manage the fiscal deficit of the economy.

Capital Receipt is Taxable or Not

As per the official website of the Income Tax department, “all capital receipts are exempt from tax unless there is a specific provision for taxing them.​"

Capital receipts are subject to capital gains tax only when they involve a transaction in capital assets. Otherwise, there is no specific provision for taxing capital receipts.

Capital gains are essentially the rise in the price of an asset while it is sold. It is applicable to the difference between the final and original price of the capital asset. A capital asset can be a stock or bond and tangible fixed assets such as machinery, inventory and land.

Capital Receipts Examples

There are several ways in which a company can receive capital receipts. We illustrate it with some examples:

• Selling Shares to the Public and Shareholders: When a private company sells its shares to the public for the first time, it has to opt for an Initial Public Offering (IPO). It is the debut of the company on the stock exchange. Those who buy the shares of the company are shareholders in the primary market. 
  After a stock is listed on a stock exchange, these investors can sell these shares at a higher price than what they bought them for. The sale of shares in the secondary market results in capital gains. 
  In the process of buying shares, they are essentially giving money to the company. Thus it shores up the capital receipts of the company. IPOs are a major source of money for companies.
• Sale of Assets: Selling assets is an important way of raising capital receipts. Such capital receipts lead to an increase in a company's net worth. It can include the sale of property, land, buildings, machinery, inventory, patents, copyrights, goodwill and other fixed assets. It can also include the selling of bonus shares.
  In the case of the Indian Government, this also includes disinvestment of Public Sector Undertakings (PSU).
• Borrowing Loans: Borrowings are capital receipts created by taking loans or issuing debt instruments such as bonds or treasury bills (T-bills). On the balance sheet, these borrowings are recorded as a liability. When the interest is paid for these borrowings, it will be registered as an expense. Thus borrowings create a debt-oriented capital receipt.
  A company can take a loan from a bank or financial institution to finance a new project or business endeavour. This is registered as a liability in the balance sheet as the company is bound to repay it with interest. It is also a capital receipt as it is recorded as inflows in the company’s cash account. 
• Small Savings Scheme: Like borrowings, this is also a debt capital receipt as it creates a liability for a government. Some of the famous examples of small savings schemes in India are National Saving Certificates, Kisan Vikas Patra, Sukanya Samriddhi Scheme, and Post Office Time Deposits.
• Issuing Debentures and Other Debt Instruments: Government entities and companies often issue debt instruments in the form of bonds and debentures. They practically act like a loan and help finance a company or government’s activities.
  Debentures are not backed by any collateral and their purchase depends on the creditworthiness and reputation of the issuer. Companies issue debentures because they have a long repayment period and lower interest rates.
• Insurance Claims for Physical Damage: A company can buy insurance for reasons such as protection for its equipment or hardware. After judging its exposure to risks, a company can judge how much it should invest into buying an insurance plan. Once insurance is claimed, it will be categorised as a capital receipt because it entails cash inflows.
• Government Grants: Non-repayable funds provided by the government for specific projects or purposes, such as infrastructure development or research and development activities.

What is a Revenue Receipt?

Revenue receipts refer to the receipts of income which a company or government makes from its day-to-day activities. It does not involve the creation of liabilities or the sale of assets. It is a function of the products and services which are offered in the market.

These revenues are recurring in nature as they are the products of the daily business of a company or government. It is part of the profit-and-loss or income statement of a company.

From the definition, it is clear that any type of receipt needs to satisfy one of the two conditions to be called as revenue receipt –

• First, it must not reduce the assets of the company.
• Second, it must not create any liability for the company.

Purpose of Revenue Receipt

Revenue receipts are a key resource for a company. The very reason for a business’s existence is to generate revenue. Revenue receipts help to accomplish this on a day-to-day basis. This has further implications.

For example, when a business offers goods and services in the market it expands the number of choices available to customers. With more revenue receipts, a company will also be able to expand operations, thus hiring more people, and creating more jobs and wealth for the national economy.

The two main advantages of revenue receipt are that it does not lead to the creation of liabilities or the selling of major assets. It is recurring in nature. Thus, it is essential for not just the success but for the very survival of a business. 

Revenue Receipt is Taxable or Not

As per the official website of the Income Tax department, under the IT Act, 1961, all revenue receipts are taxable, unless they are specifically granted exemption from tax.

Thus, all revenue receipts of a company are taxed as part of its annual income.

Revenue Receipts Examples

In this section, we will explain revenue receipts with some examples:

• Selling of Products or Services: The revenue that a company makes by selling goods and services regularly is part of its revenue receipts. For example, every time you buy food from a food delivery app or clothes from an e-commerce website, the transaction is registered in its income statement and becomes part of its revenue receipts.
• Tax Revenue: The revenue which a government earns by imposing taxes becomes part of revenue receipts. The government uses this money to fund schemes, projects and the welfare of the country.
  This can be further divided into direct and indirect taxes.
  • Direct Tax: It refers to taxes imposed on individuals, companies, and specific things like inherited wealth. Some examples are income tax, wealth tax, corporate tax, capital gains tax, etc. All of these can boost the revenue receipts of a government.
  • Indirect Tax: This includes taxes imposed on goods and services. In this case, the actual responsibility for paying tax can be shifted from one part of the supply chain to the other. 
    For example, if the government imposes a tax on any commodity, then sellers should be the ones paying tax. Instead, the seller can shift the burden of paying taxes to the consumer. This is also a recurring transaction and part of the revenue receipt of a government body.
• Non-Tax Revenue: As the name suggests, it refers to revenue receipts which are not generated from taxes. In the case of governments, this includes fees charged for services, interest on loans, fines and penalties, profits and dividends from PSUs, etc.
• Receiving Discounts: When a company receives discounts from its supplier or vendor, it is also considered a revenue receipt because it doesn’t lead to an increase in liabilities of the company.
• Government Grants and Subsidies: Regular grants and subsidies received from the government to support operational activities.
• Miscellaneous Income: Any other minor or irregular income not classified under the above categories, such as gains from foreign exchange fluctuations, recovery of bad debts, or refunds and rebates.

Key Differences between Capital Receipts and Revenue Receipts

Till now you have read about capital receipts and revenue receipts. Now we will highlight the differences between the two.

Similarities between Capital Receipts and Revenue Receipts

Having gone through the differences between capital receipts and revenue receipts, let's now see what are the similarities between them.

• Both of them represent the income of a company in different ways. Thus both can be used to judge the financial health of a company.
• The revenue generated from both can be used to expand the business of a company.

Receipts are the earnings of a company or a government body that may or may not add to its profit/loss. Capital receipts result in the formation of new assets for a company. These include non-recurring revenue like borrowings, sale of assets, investments, etc. On the other hand, revenue receipts are generated from the current operations of a business and include income from sales, rents, discounts, dividends, etc.