Companies (Accounting Standards) Amendment Rules, 2026: A Legal Analysis of the Amendment to AS 22 – Accounting for Taxes on Income

This paper deals with the Companies (Accounting Standard) Amendment Rules, 2026 issued by the Ministry of Corporate Affairs dated 10 March 2026 which led to changes in Accounting Standard 22 on taxes on income. The changes were due to the OECD’s Pillar Two framework, an international plan meant to force big multinational corporations to pay an effective tax rate of at least fifteen percent, no matter where their profits are generated. The amendment first extends the definition of the standard definition of deferred tax, which requires timing differences to recognize deferred tax assets or liabilities, to top-up taxes that are worked out for a consolidated and group-wide basis. Instead of that relief, a series of disclosure obligations are added with a set of stages, with companies having to make a statement that the exception has been applied to them, report on the current tax cost to which they are subject, and disclose a forward-looking and measurable amount of their exposure. The study explains the rationale behind the regulation, examines the relationship between exemption and transparency, identifies stakeholders impacted by the regulation, and provides guidance on the compliance actions that finance and accounting functions should be taking to prepare for reporting requirements ahead of FY 2025-26.

The amendment of the Companies (Accounting Standards) Rules, 2026, is integrated into the Creation of International Tax Regime and introduces the term ‘Top-up taxes’. The Companies (Accounting Standards) Amendment Rules, 2026 (Amendment 2026) is a part of the Creation of International Tax Regime, and this amendment also introduces the term ‘Top-up taxes’.

Introduction

Accounting Standards 22 provides ‘Accounting for Taxes on Income’. Basically, it governs how Indian enterprises calculates, recognize and disclose the deferred tax assets and liabilities. Deferred taxes are the taxes that are postponed or advanced to future periods due to temporary differences between the accounting income and taxable income. Recognition and measurement of deferred tax is done in the manner of – Identifying the temporary differences, calculate deferred tax and recognize deferred tax in financial statements.

On 10 March, 2026, the Ministry of Corporate Affairs (MCA) published the Companies (Accounting Standards) Amendment Rules, 2026 (Notification No. G.S.R. 169(E)) amending AS 22 in line with the global tax reform roadmap of OECD (Organization for Economics co-operation and development) Pillar Two Model Rules to introduce a global minimum tax regime.

This amendment marks a significant departure from the conventional deferred tax framework and requires immediate attention from company managements, statutory auditors, and finance and accounting professionals alike. This article examines the legislative background, the substantive changes introduced, the exceptions carved out, the entities affected, and the compliance obligations now cast upon financial and accounting teams.

Background

This amendment stems from a broader change taking place in global tax policy. The OECD has adopted the Pillar Two Model Rules that will establish a global minimum effective tax rate for the largest multi-national corporations with revenues exceeding EUR 750 million. A Pillar Two policy, after it is in place, will allow a country to introduce a “top-up tax” on all multinationals with an effective tax rate below the 15% minimum. The purpose of this mechanism is to deter companies from moving profits to lower tax countries simply to cut the tax rate.

India, in keeping with this evolving global consensus, chose to bring its own framework in line with the new regime. The difficulty was not that AS 22 failed to exist, it already exists, but that its underlying methodology was never built to handle a tax of this kind. Pillar Two liabilities are not worked out asset-by-asset or through the usual timing-difference approach that ordinary deferred tax accounting relies on. Instead, they are calculated collectively, across the entire group and multiple jurisdictions at once, using formulas far more intricate than anything AS 22 originally contemplated. Attempting to force such liabilities through the conventional deferred tax process risked producing figures that were unreliable, inconsistent, and in some cases essentially arbitrary.

To resolve this regulatory and practical gap necessitated legislative intervention. The amendment was issued in exercise of powers under Section 133 read with Section 469 of the Companies Act, 2013, and in consultation with the National Financial Reporting Authority constituted under Section 132 of the Act, thereby amending the Companies (Accounting Standards) Rules, 2021.

Amendment

The amendment introduces two changes at different level i.e. extended the scope and inserted discrete disclosure regime. It can be understood as in following manner-

Extension of Scope-

The amendment inserts a new Paragraph 2A into AS 22, which operates to bring within the ambit of the standard “taxes on income” arising from legislation enacted, or substantively enacted, to give domestic effect to the OECD’s Pillar Two Model Rules, including Qualified Domestic Minimum Top-up Taxes.

Prior to the amendment, AS 22 contained no textual basis, express or implied, for treating top-up taxes computed under a consolidated, jurisdiction-blending formula as falling within “taxes on income” for the purposes of the standard. Paragraph 2A thus performs the threshold function of establishing that Pillar Two liabilities are, as a matter of accounting classification, taxes on income to which AS 22 applies.

Insertion of a disclosure-

The amendment introduced four new provisions i.e., 32 A to 32D, collectively named as ‘International Tax Regime- Pillar Two model Rules’. They constitute a disclosure code operating independently of the exception. Their operative content are as follows-

Provision 32A requires an enterprise to disclose that it has applied the exception to recognizing and disclose about deferred tax assets and liabilities related to Pillar two income Taxes.

Provision 32B provides for an enterprise to disclose its current tax expense (income) separately.

Provision 32C Disclosure of known or reasonably estimable exposure during the period between enactment and effectiveness of Pillar Two legislation. Basically, it addressed the transitional information gap before top up tax liability crystallizes.

Provision 32D requires disclosure of both qualitative and quantitative information.

Exceptions

The amendment introduces a specific exception under which enterprises are not required to recognize or disclose deferred tax assets or deferred tax liabilities arising from Pillar Two income taxes. In other words, notwithstanding that Pillar Two top-up taxes may, in principle, give rise to timing differences of the sort AS 22 ordinarily requires enterprises to account for through deferred tax, the standard now expressly relieves enterprises of that obligation in respect of Pillar Two taxes specifically. This exception, together with its corresponding disclosure requirement under Paragraph 32A, is to be applied immediately upon issue of the amendment and retrospectively.

Furthermore, one small exception has been provided by the amendment that a small and medium sized company may be exempted from the disclosure requirements laid down in Paragraphs 32C & 32D.

Applicability-

The amendment is of general application to all companies governed by the Companies (Accounting Standards) Rules, 2021 that is, companies preparing financial statements under AS (as distinct from Ind AS). Its practical impact, however, is concentrated among large multinational enterprise groups with consolidated revenues exceeding the EUR 750 million Pillar Two threshold and operations spanning multiple tax jurisdictions.

Enterprises should know that while Paragraphs 32B-32D apply to annual reporting periods beginning on or after 1 April 2025, the amendment grants specific transitional relief for interim reporting: no disclosure under these paragraphs is required for any interim period ending on or before 31 March 2026. In practical terms, this means a company’s FY 2025-26 annual financial statements must contain the Para 32B–32D disclosures, but its quarterly or half-yearly statements filed during that same year are exempt from doing so

Role of Financial and Accounting Teams-

The amendment casts several important obligation on corporate finance and accounting teams. This statement can be supported by the fact that the amendment has increased exposure, recognitions etc. Their important role can be understood from below points or functions-

• Finance team must first determine whether the enterprise, or its groups, falls within the Pillar Two framework, having regard to consolidated revenue thresholds and the jurisdictions in which the group operates.
• Where any deferred tax asset or liability has already been recognized in respect of Pillar Two taxes, contrary to the new Paragraph 2A exception, that must be identified and reversed.
• For financial statements, teams must prepare the note disclosing that the Paragraph 2A exception has been applied, as per Paragraph 32A, quantify the current tax expense attributable to Pillar Two taxes separately, as per Paragraph 32B, and, unless the SMC exemption applies, compile the qualitative and quantitative exposure information required under Paragraphs 32C and 32D.
• Since Pillar Two exposure often involves estimation in the transitional period before legislation takes full effect, accounting teams should maintain a clear record of the basis for any estimates disclosed, to support the “known or reasonably estimable” standard set out in Paragraph 32C.

Conclusion

The Companies (Accounting Standards) Amendment Rules, 2026 mark a focused yet significant adjustment to AS 22, made with the aim of bringing Indian accounting practice into step with the OECD’s Pillar Two global minimum tax framework. On one hand, the amendment carves out a specific exception that relieves enterprises from the ordinary requirement to recognize deferred tax on Pillar Two liabilities. On the other, it counterbalances that relief by introducing a more demanding disclosure regime under Paragraphs 32A to 32D. Taken together, these two moves reflect an attempt to strike a workable balance, sparing companies from an accounting exercise that would otherwise be unreliable, while still ensuring that financial statements remain transparent about the true impact of Pillar Two taxation.

This is not something companies can afford to leave until the next reporting cycle rolls around. It calls for early action, assessing exposure without delay, reversing any deferred tax that may already have been recognized in a manner inconsistent with the new exception, and putting the required disclosures in place well before the FY financial statements are finalized. Ultimately, the responsibility for carrying out this transition correctly, and in full compliance with the amended standard, rests with finance and accounting teams working closely alongside statutory auditors.

Author: Jyotsna Chaturvedi, Head – Corporate Practice