Section 91 of Income Tax Ordinance, 2001 intricately outlines the treatment of income earned by minor children during a tax year, shedding light on how such earnings should be assessed and taxed.
The updated Income Tax Ordinance, 2001, incorporating amendments, was released by the Federal Board of Revenue (FBR) and is effective as of June 30, 2021.
In a bid to bring greater clarity to the taxation of minor children, the Finance Act, 2021 introduced a notable amendment to the Income Tax Ordinance, 2001 through Section 91.
The amended Section 91 reads: “Income of a minor child.— (1) Any income of a minor child for a tax year chargeable under the head ‘Income from Business’ shall be chargeable to tax as the income of the parent of the child with the highest taxable income for that year.
(2) Sub-section (1) shall not apply to the income of a minor child from a business acquired by the child through an inheritance.”
This provision addresses the treatment of income earned by minor children, particularly when categorized under “Income from Business.” Let’s delve into the key components of Section 91:
1. Attribution of Income to Parent:
• Subsection (1) establishes that any income of a minor child falling under the category of “Income from Business” during a tax year shall be attributed to the parent with the highest taxable income for that year. This approach ensures that the tax liability associated with a minor child’s business income is borne by the parent with the greatest financial capacity.
2. Exception for Inherited Business Income:
• Subsection (2) introduces an exception to the general rule outlined in subsection (1). It stipulates that the attribution of a minor child’s income to a parent does not apply if the income is derived from a business inherited by the child. In such cases, the income remains under the purview of the minor child, recognizing the unique circumstances surrounding inherited business assets.
The introduction of Section 91 is viewed as a strategic move to address potential complexities in the taxation of minor children’s income. By attributing the income to the parent with the highest taxable income, the amendment aims to ensure a fair and practical distribution of tax liability associated with minor children engaged in business activities.
The exception carved out for income from an inherited business acknowledges the distinct nature of such earnings, allowing minor children to retain autonomy over income derived from inherited entrepreneurial endeavors.
While the overarching principle of attributing minor children’s business income to the parent aligns with efforts to streamline tax procedures, some tax professionals emphasize the need for vigilance in implementing this provision. Clear guidelines and effective communication from tax authorities are essential to facilitate compliance and understanding among taxpayers.
Section 91 of the Income Tax Ordinance, 2001 stands as a key provision in the taxation landscape, offering a systematic approach to the treatment of income earned by minor children. By establishing rules for attributing business income to parents and recognizing the nuances of inherited business assets, this amendment contributes to a more comprehensive and equitable taxation framework in Pakistan. As tax authorities continue to refine regulations, Section 91 serves as a cornerstone for navigating the complexities of minor child income taxation.
