- What is Capital Goods?
- Examples of Capital goods?
- Why is Capital Goods important?
- What is capital gains?
Question from a reader: What is the difference between Capital Goods and Capital Gains?
- 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.
- Heavy equipment (such as excavators, forklifts, generators, metal-forming or metal-working machines, vehicles).
|boilers, storage tanks, evaporators||Chemical factory|
|Mixer, grinders, refidgerators||Ice-cream factory|
|Dumpsters, bulldozers etc big vehicles||Construction, 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.
- 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
- 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
- Land (but not the agricultural land)
- 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).
- Shares, debentures, mutual funds etc.
- 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).
Q1. Which of the following is correct
- Capital Gains tax, Custom duty are examples of Direct tax
- Agricultural land is exempted from Capital Gains tax.
- Only 1
- Only 2
Q2. Which of the following are not Capital goods?
- Wheat stored in a granary
- Boiler in a chemical factory
- Air-conditioner in a corporate executive’s office
- Only 2
- Only 1 and 2
- Only 1 and 3
- Only 2 and 3