The Karnataka High Court has struck down the Health Security-cum-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 pouch-packing machines, rather than actual production, was arbitrary, unreasonable and violative of Article 14 of the Constitution.
The single-judge Bench of Justice M Nagaprasanna upheld Parliament’s legislative competence to enact a law imposing a tax, surcharge or cess under its constitutional powers. However, the Court held that the manner in which the cess was structured and implemented failed the constitutional test of equality and non-arbitrariness, rendering the Act, the Rules and the consequential notifications unconstitutional to that extent.
The Court was hearing a batch of writ petitions challenging the constitutional validity of the legislation, which came into force in February 2026 to impose a capacity-based excise cess on products such as pan masala for raising funds towards public health and national security. Under the impugned framework, the levy was not linked to the actual quantity of pan masala manufactured or supplied. Instead, it was calculated on the basis of the number of pouch-packing machines installed and their presumed production capacity, irrespective of actual output.
Opposing the petitions, Additional Solicitor General N. Venkataraman argued that the pan masala industry was notorious for tax evasion despite high GST rates and that the legislation sought to curb revenue leakage by shifting the taxable event from production or supply to machine ownership and installed production capacity. It was further contended that the law had been enacted in public interest and fell within Parliament’s legislative competence.
The High Court, however, rejected the justification and held that a fiscal statute cannot be founded on assumptions or deemed production. It observed that manufacturers using machines with different production capacities were subjected to the same cess merely because they possessed similar machines, resulting in an arbitrary classification lacking any rational nexus with the object sought to be achieved.
To illustrate the constitutional infirmity, the Court referred to the case of a manufacturer operating a machine capable of producing 65 pouches per minute. It noted that such a machine would manufacture around 7.8 lakh pouches over 25 working days, with a maximum retail value of approximately Rs 31.20 lakh. Despite this, the manufacturer would be liable to pay nearly Rs 1.01 crore as cess, taking the total indirect tax liability to about Rs 1.09 crore after GST. The Court held that such a disproportionate fiscal burden demonstrated manifest arbitrariness and failed the test of reasonableness under Article 14.
The Court also examined Rule 15(a), which provided abatement from cess only where manufacturing activity remained completely suspended for a continuous period of at least 15 days. It held that the provision ignored genuine operational contingencies such as machinery breakdown, shortage of raw materials or labour, factory maintenance and other temporary disruptions lasting for shorter periods. Consequently, manufacturers could still be compelled to pay cess despite there being no production during such shutdowns.
Rejecting the Union government’s defence that the threshold was necessary to prevent bogus claims, the Court held that administrative convenience or the objective of preventing tax evasion could not justify an arbitrary statutory classification or an unreasonable restriction. It observed that the Rules proceeded on the presumption that every assessee was likely to evade tax, which could not be sustained in constitutional law.
While partly allowing the petitions, the High Court reaffirmed that Parliament possesses the constitutional authority to enact a cess legislation. However, it held that the present framework, which imposed cess on assumed production rather than actual manufacture, was vague, unreasonable and discriminatory, thereby violating Article 14. Consequently, the Court struck down the relevant provisions of the Health Security-cum-National Security Cess Act, 2025, the corresponding Rules and the notifications issued under the legislation. At the same time, it clarified that the judgment would not prevent the Union government from enacting a fresh law imposing such a cess, provided the levy is structured in a constitutionally valid manner and addresses the defects identified in the judgment.
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