The Karnataka High Court has struck down the Health Security and National Security Cess Act, 2025, and the Rules framed under it, holding that the Union government’s method of levying cess on pan masala manufacturers based on the presumed production capacity of machines, rather than actual output, was arbitrary and violated Article 14 of the Constitution.
The bench of Justice M. Nagaprasanna upheld the verdict in Dhariwal Industries v. Union of India & Ors., holding that Parliament’s legislative competence to impose a tax, surcharge or cess. However, the Court ruled that the manner in which the cess was implemented failed the constitutional test of equality, rendering the Act and the Rules unconstitutional.
The petitions challenged the validity of the legislation, which came into force in February 2026 to impose a capacity-based excise cess on products such as pan masala to generate funds for public health and national security. Instead of taxing actual production or sales, the law calculated cess based on the number of pouch-packing machines installed and their estimated production capacity.
Defending the law, Additional Solicitor General N. Venkataraman argued that the pan masala industry was particularly prone to tax evasion and that shifting the taxable event from production or sales to machine ownership was intended to plug revenue leakage.
The Court, however, found the methodology irrational. It cited an example where a machine capable of producing 65 pouches per minute would generate about 7.8 lakh pouches over 25 working days. While the maximum retail value of the output would be Rs 31.20 lakh, the manufacturer would still be required to pay approximately Rs 1.01 crore as cess, with the total tax liability rising to Rs 1.09 crore after GST. The Court held that such a disproportionate levy demonstrated manifest arbitrariness.
The High Court also rejected the government’s reliance on the Rules’ abatement mechanism, which allowed a reduction in cess only if production remained suspended for at least 15 consecutive days. It observed that temporary shutdowns due to machinery failure, shortage of labour or raw materials, or maintenance work could last for shorter periods, yet manufacturers would still be liable to pay cess despite producing nothing.
The Court further held that the Rules unfairly presumed that all manufacturers were potential tax evaders and that administrative convenience could not justify such an arbitrary threshold. It also found fault with the classification under the Act, noting that manufacturers operating machines with vastly different production capacities were subjected to the same cess, leading to unequal treatment.
Accordingly, the High Court declared the capacity-based cess regime unconstitutional for violating Article 14. At the same time, it clarified that the judgment would not prevent the Union government from enacting a fresh cess law, provided it conforms to constitutional requirements and addresses the deficiencies identified by the Court.
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