This article will help you to learn about the difference between revenue and capital receipts of government receipts (with definition).
Difference between Revenue and Capital Receipts of Government Receipts (With Definition)
Government receipts are divided into two groups—Revenue Receipts and Capital Receipts.
All Government receipts which either create liability or reduce assets are treated as capital receipts whereas receipts which neither create liability nor reduce assets of Government are called revenue receipts.
Government receipts which neither (i) create liabilities nor (ii) reduce assets are called revenue receipts. These are proceeds of taxes, interest and dividend on government investment, cess and other receipts for services rendered by the government. These are current income receipts of the government from all sources. Government revenue is the means for government expenditure. In the same way as production is means for consumption. Revenue receipts are further classified Into Tax Revenue and Nontax Revenue as explained in Section 9.6.
Government receipts which either (i) create liabilities (e.g. borrowing) or (ii) reduce assets (e.g. disinvestment) are called capital receipts. Thus when govt. raises funds either by incurring a liability or by disposing off its assets, it is called a capital receipt.
(A) Two examples of Capital Receipts which create liability are Borrowing and raising of funds from Public Provident Fund and Small savings deposits. How? (i) Borrowings are treated capital receipts because they create liability of returning loans, (ii) Similarly, funds raised from PPF, small saving deposits In post offices and banks are treated capital receipts because they Increase liability of the government to repay these amounts to PPF (Public Provident Fund) holders and small savings depositors.
(B) Two examples of Capital Receipts which reduce assets are Disinvestment and Recovery of Loans. (D2006, 12C) How? (i) Disinvestment by government means selling a part or whole of its shares of public sector undertakings (e.g., HMT, LIC, and FCI). Funds raised from disinvestment reduce government assets (ii) Recovery of loan is also capital receipt as It reduces government assets.
For Instance, If UP government, which has taken loan of Rs 100 crore from Central government, repays Rs 20 crore, value of Central government assets of Rs 100 crore is now reduced to Rs 80 crore because of partial recovery of loan.
Difference between Revenue and Capital Receipts:
The main difference between revenue receipts and capital receipts is that in the case of revenue receipts, government is under no future obligation to return the amount, i.e., they are non-redeemable. But In case of capital receipts which are borrowings, government is under obligation to return the amount along with Interest.
Debt Creating and Non-Debt Creating Capital Receipts:
Capital receipts may be debt creating or non-debt creating. Examples of debt creating receipts are—Net borrowing by government at home, loans received from foreign governments, borrowing from RBI. Examples of non-debt capital receipts are—Recovery of loans, proceeds from sale of public enterprises (i.e., disinvestment), etc. These do not give rise to debt.