Karnataka High Court Strikes Down Centre’s Pan Masala Cess as Unconstitutional

The Karnataka High Court has struck down the Health Security Cess Act passed by the Union government, ruling that it violates Article 14 of the Constitution, which guarantees equality before the law. The decision came on a batch of petitions filed by pan masala manufacturers challenging the levy.

Justice M Nagaprasanna, who heard the case, upheld the Union government's power to impose a cess but found that the manner of its imposition was 'unreasonable and vague'. The court said the cess was based on assumed production capacity of machines rather than actual production, making it arbitrary.

Under the impugned Act, the cess was not levied on the final product—pan masala pouches—but on the machines used for production, based on their maximum potential output. Manufacturers argued that this was unfair because machines of different capacities were treated equally, and the levy did not account for actual production volumes.

Senior Advocate G Shivadass, representing the petitioners, argued that the cess could not be legally imposed on 'deemed production' and should only be on actual production. Additional Solicitor General N Venkataraman defended the law, saying it was necessary to regulate a sector notorious for tax evasion and public health concerns. He noted that despite high GST rates, revenue from the pan masala sector had been falling far below its production capacity.

The court rejected the government's justification, stating that the capacity-based approach failed to consider that different machines have different output rates. The bench observed that the cess was calculated assuming each machine produces 500 pouches per minute, even when actual capacities vary. This lack of differentiation made the levy arbitrary and violative of Article 14.

Additionally, the court criticised the rules that allowed exemption from cess only if manufacturing was suspended for at least 15 continuous days. It noted that shorter shutdowns—due to breakdowns, raw material shortages, or maintenance—were not accommodated, and called this threshold arbitrary. The government's argument that the rule prevented bogus claims was not accepted; the court said administrative convenience cannot override constitutional guarantees.

The ruling partly allows the petitions and declares the Act and its rules unconstitutional to the extent they levy cess based on assumed production capacity. However, the court affirmed the Union government's legislative power to impose such a cess in principle.