Economy, asked by Jagadeesh11111, 3 months ago

What is the difference between revenue receipts and capital receipts of the government? Which source is considered better, give reasons in support of your answer?​

Answers

Answered by ApprenticeIAS
3

Government receipts are divided into two groups—Revenue Receipts and Capital Receipts. Nearly three-fourths of central government’s receipts come from revenue receipts, while one-fourth comes from capital receipts. All Government receipts which either create liability or reduce financial assets are treated as capital receipts, whereas receipts which neither create liability nor reduce assets of the Government are called revenue receipts.

Revenue receipts are of two types; Non-Tax Revenue and Tax Revenue receipts :-

  • Non-Tax Revenue is the recurring income earned by the government from sources other than taxes, like, interest receipts, dividend and profits received from public sector companies.

  • Other examples of non-tax revenue include; petroleum license, power supply fees, fees for communication services, broadcasting fees, toll taxes, examination fees, receipts relating to defence service etc.

  • Tax Revenues are receipts of the government through direct and indirect methods of taxation. Direct taxation includes; taxes on income or wealth, while indirect taxes are imposed upon a transaction, for example, Goods & Services Tax (GST).

Capital receipts are also of two types; Non-debt receipts and Debt Receipts :-

  • Borrowings are capital receipts as they lead to an increase in liability of the government. Similarly, receipts from sale of shares of public enterprise are a capital receipt as it leads to reduction in assets of the government.

  • Non-debt receipts are those which do not incur any future repayment burden for the government. Examples include; disinvestment, issue of bonus shares, recovery of loans and advances given to state governments, Union territories and foreign governments, etc.

  • Debt Receipts have to be repaid by the government. A reduction in debt receipt (or borrowing) improves financial health of the economy as it reduces debt burden of the government.

  • Market loans, issuance of special securities to public-sector banks, issue of securities, short-term borrowings, treasury bills, securities against small savings, state provident funds, relief bonds, saving bonds, gold bonds, external debt, etc. are all example of debt capital receipts.

Following are few other differences between Revenue receipts and Capital receipts :-

  • In the balance sheet, capital receipts are mentioned in the liabilities section. Revenue receipts are mentioned in assets section.

  • Capital receipts are non-recurring in nature as they are one time receipts, unlike revenue receipts.

  • Capital receipts are non-routine in nature. Revenue receipts are routine in nature as they are fixed set of payments that the government receives on monthly or annual basis.

  • All capital receipts are tax-free, unless there is a proviso to tax it. It is relatively a better option for the government to depend on revenue receipts to meets its receipts budget.

Following are reasons why revenue receipts are a better option to depend on :-

  • A higher dependence on capital and non-tax revenue receipts shows less confidence about tax revenue.

  • Depending on higher revenue realisation from disinvestment, telecom services etc. are not a regular or sustainable source of finance.

  • If receipts from disinvestment and other such capital receipts fail to match budgeted estimates, it gives a major setback to government’s investment plans.

  • A higher dependence on regular tax receipts (with high revenue buoyancy) is required in order to maintain a sustainable growth momentum.

  • Normal ‘trading’ activities generate revenue receipts (as opposed to capital receipts). This increase cash and equity.

  • Debt Receipt component of capital receipts only increase government’s liability, adding to its future debt burden. This cannot be sustainably repaid by incurring more debt receipts, but only by sustainable revenue receipts.

While both revenue and capital receipts form part of the receipt component of the budget, government borrowing is sustainable only as long as the rate of return on investment is greater than the interest rate payable. In case the private investment climate is not positive, it is not advisable to rely heavily on the capital budget, especially debt receipts. Non-debt component of capital receipts is a relatively more viable option for the governments because it doesn’t have any debt or repayment impact. However, non-debt receipts also work only in the short or medium run, because in the long run, government may not be left with any assets to disinvest. Hence, it is most reliable and sustainable to focus on revenue receipts. They can be managed better by increasing tax base and fixing loopholes in the taxation system.

Hope it helps you.

Answered by Jaiganesha
0

What is the difference between revenue receipts and capital receipts of the government? Which source is considered better, give reasons in support of your answer?

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