[Economy] Capital Goods and Capital Gains: Meaning, Difference Explained

Economy, miscellaneous

  1. What is Capital Goods?
  2. Examples of Capital goods?
  3. Why is Capital Goods important?
  4. What is capital gains?

Question from a reader: What is the difference between Capital Goods and Capital Gains?

What is Capital Goods?

  • Capital goods are the tools and machinaries used for producing consumer products.
  • They’re (usually) expensive, and they’re purchased for long-term use.
  • Raw materials are also needed for producing consumer goods (Biscuits, bread etc) but they are not capital goods.
  • Capital goods are also known as producer goods.

Examples of Capital goods?

  • Heavy equipment (such as excavators, forklifts, generators, metal-forming or metal-working machines, vehicles).
boilers, storage tanks, evaporatorsChemical factory
Mixer, grinders, refidgeratorsIce-cream factory
Dumpsters, bulldozers etc big vehiclesConstruction, mining industry.
  • In short, factory equipment are capital goods because they’re used to produce customer goods.
  • But the equipment used in an office= not capital goods for example stapler, paper shredder, pen-holder, water-cooler table, chair etc.
  • Similarly, specialized air-conditioners installed in drug/ ice-cream factories to maintain uniform temperature during production= capital goods.
  • But air-conditioners installed in that factory owner’s cabin=not capitals goods.

Why is Capital Goods important?

  • If Capital goods are expensive, then companies cannot buy them=low production= low GDP.
  • If they buy expensive capital goods, they’ll keep final product’s MRP high to keep the profit margin same.
  • Hence, Government gives tax reliefs  on purchase/import of Capital goods by businessmen.
  • When you want to import Capital goods from a foreign country (e.g. USA ), you’ll need pay them in their own currency (dollars)?
  • So where to arrange for the dollars? Recall the FCNR account article Click ME

What is capital gains?

  • Capital gains= profit made by selling your capital assets.
  • When you make profit by selling your capital assets, you’ve to pay tax to the Government on that profit. That is known as Capital Gains Tax. (CGT)
  • Examples of Capital Assets are
  1. Land (but not the agricultural land)
  2. Building Factory Plant and machinery. (except raw-material, or finished products) So when you sell capital goods discussed above, and make profit, then you’ll have to pay capital gains tax (CGT).
  3. Shares, debentures, mutual funds etc.
  4. jewelry, paintings, sculptures and other Archaeological collections. (from 2008 onward)
  • Capital gains tax are of two types: short term and long term. (depending on how long you kept the asset before selling it.)
  • Capital gains tax is a direct tax. (because direct tax=charged on your income and property).
  • For more on Capital Gains tax, check Vodafone Case article click me).

Mock Qs

Q1. Which of the following is correct

  1. Capital Gains tax, Custom duty are examples of Direct tax
  2. Agricultural land is exempted from Capital Gains tax.
  1. Only 1
  2. Only 2
  3. Both
  4. none

Q2. Which of the following are not Capital goods?

  1. Wheat stored in a granary
  2. Boiler in a chemical factory
  3. Air-conditioner in a corporate executive’s office
  1. Only 2
  2. Only 1 and 2
  3. Only 1 and 3
  4. Only 2 and 3