As per section 91 Income Tax Ordinance 2001

1. Income from Business of Minor Child:

   • Section 1 states that any income a minor child earns from a business in a given tax year will be taxed as if it were the income of the child's parent with the highest taxable income for that year. This means that the child’s business income will not be taxed in the child’s name but will be transferred to the parent whose total income is higher, and it will be taxed as part of their income.

2. Exception for Inherited Business Income:

   • Section 2 provides an exception to this rule: the income earned by a minor child from a business acquired through inheritance (i.e., inherited from a deceased family member) will not be taxed as the parent's income. This means that if the child inherits a business, the income from that business is not subject to the same rule of taxation that applies to other income from businesses the child might own or run.

Explanation:

• Income of a Minor Child from Business:

  • If a minor child is earning income from a business, this income would typically be considered the child’s income. However, under the law, this income is treated differently when it is earned under the "Income from Business" category.
  • Instead of taxing the child directly, the income is treated as the income of the parent with the highest taxable income. For example, if one parent has a higher income than the other, the child’s business income will be added to the higher-income parent's total taxable income for that year, and the parent will be responsible for paying the tax on that income.

• Why the Law Exists:

  • This provision is likely in place to prevent parents from transferring income-generating businesses to their minor children as a way to avoid higher taxes. By taxing the child's income through the parent with the higher taxable income, the law ensures that any income generated from the minor child’s business is taxed at the parent's tax rate, which is likely higher.

• Exception for Inherited Business:

  • If the minor child receives a business through inheritance, the income from that business is treated differently. In this case, the business is not considered to be the child’s business income for tax purposes. This means that the child does not have to pay tax on that income as though it were the parent’s. Instead, the minor child may be able to handle the income separately, depending on the specifics of the tax law in their jurisdiction.

Purpose and Implications:

• Preventing Tax Avoidance: The primary purpose of these rules is to ensure that parents cannot transfer income to their children as a means of lowering the family’s overall tax liability. By treating the child’s income as the parent's, the law prevents such avoidance strategies.
• Inheritance Exception: The exception for income from an inherited business recognizes that the child has not actively earned the income but has instead received it through inheritance, which could have different implications for taxation.

This provision aims to balance fairness in the tax system while providing reasonable exceptions, like inherited businesses, to prevent overtaxing minors who have not actively engaged in running or managing the business themselves