Karnataka High Court Strikes Down Cess on Pan Masala Based on Machine Capacity, Calls It Arbitrary

The High Court of Karnataka has declared the Health Security se National Security Cess Act, 2025, and its associated Rules unconstitutional, ruling that the levy of cess based on the assumed production capacity of machines—rather than actual output—violates Article 14 of the Constitution.

Justice M. Nagaprasanna, while partly allowing petitions filed by M/s Dhariwal Industries Pvt. Ltd. and others, noted that the cess was imposed not on the product but on the machinery used for production, and the assumed capacity led to grave discrepancies bordering on arbitrariness.

The Court illustrated the anomaly with a hypothetical calculation: for a machine capable of producing 65 pouches per minute, the monthly cess liability under the Act would be ₹1.01 crore. Combined with GST, the total tax burden would reach ₹1.09 crore, while the maximum retail value of the pouches produced would be only ₹31.20 lakh.

The judgment further highlighted that a manufacturer with a machine capable of 100 pouches per minute would pay the same cess as one whose machine could produce 500 pouches per minute. This lack of rational classification treated unequals equally, violating the equality guarantee under Article 14.

The Court also criticized the Rules that allowed abatement or relief from cess payment only if a machine remained inoperative for a continuous period of 15 days or more. The bench observed that this arbitrary threshold ignored genuine cases of shorter production halts due to breakdowns, raw material shortages, or maintenance.

"The prescription of a minimum period of fifteen days proceeds solely on the presumption that assessees are likely to indulge in tax evasion. Administrative difficulties in preventing tax evasion cannot, by themselves, justify the prescription of such an arbitrary threshold under the Rules," the Court said.

While striking down the Act and Rules, the Court upheld Parliament's legislative competence to impose such a cess. It granted liberty to the Union government to enact fresh legislation that adheres to constitutional principles outlined in the judgment.