The Karnataka High Court has struck down the capacity-based pan masala cess as it imposes levy on assumed production capacity rather than actual manufacture.
The bench of Justice M. Nagaprasanna partly allowed a batch of writ petitions challenging the Health Security se National Security Cess Act, 2025, holding that while Parliament possesses the legislative competence to impose a cess, the mechanism adopted under the Act and the accompanying Rules is unconstitutional.
The petitioners/assessee had challenged the constitutional validity of the Health Security se National Security Cess Act, 2025, the Health Security se National Security Cess Rules, 2026, and the notifications issued thereunder, contending that the levy violated Articles 14 and 19(1)(g) of the Constitution and was beyond Parliament’s legislative competence.
The dispute arose after Parliament enacted the Health Security se National Security Cess Act, 2025 to raise resources for public health and national security by imposing a cess on specified manufacturers. Instead of taxing actual production, the legislation linked the levy to the number of pouch packing machines installed, effectively presuming a certain quantity of production irrespective of actual output.
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The petitioners argued that such a system taxed “deemed manufacture” rather than real manufacture and imposed an arbitrary financial burden disconnected from actual business activity. They also contended that after the introduction of the GST regime through the Constitution (101st Amendment), Parliament could not indirectly impose an additional levy on goods already subject to GST by adopting an alternative mechanism.
The Union Government defended the law by asserting that pan masala is a sector with a long history of tax evasion and serious public health implications. According to the Government, transaction-based taxation had failed to adequately capture actual production, making a machine-based cess necessary to prevent revenue leakage.
The Union further argued that the impugned levy was neither GST nor a surcharge under Article 271, but an independent cess enacted under Parliament’s residuary legislative powers, and therefore did not require recommendations of the GST Council.
The High Court rejected the argument that Parliament lacked constitutional authority to enact such legislation.
After examining Articles 246, 246A, 248, 269A, 270, 271, 279A and Entries 84 and 97 of the Union List, the Court held that Parliament continues to enjoy residuary legislative powers to enact a law imposing a cess. The Court observed that the constitutional exclusion of GST from Article 271 does not deprive Parliament of its broader legislative competence under Entry 97 of List I read with Article 246.
Accordingly, the Court upheld the Union Government’s power to enact a cess legislation.
However, the Court found the method of levy constitutionally unsustainable.
Justice Nagaprasanna held that the legislation imposed cess on the basis of assumed or presumed quantity manufactured instead of actual production, making the levy unreasonable, vague and arbitrary. Such an approach failed the test of equality under Article 14 because the tax liability bore no rational relationship to the quantity actually manufactured by an assessee.
The Court concluded that although Parliament may levy a cess, it cannot adopt a taxation mechanism founded on fictional or presumed production where actual production is capable of determination.
Consequently, the High Court declared that the provisions imposing cess through the capacity-based mechanism violated Article 14 of the Constitution.
The Court therefore held the relevant provisions of the Health Security se National Security Cess Act, 2025 unconstitutional to that extent, struck down the Health Security se National Security Cess Rules, 2026, and quashed the notifications dated 16 December 2025, 31 December 2025, 1 January 2026 and 30 January 2026 issued pursuant to the legislation.
Importantly, the Court did not prevent the Union Government from legislating in this field.
Instead, it expressly granted liberty to the Government to enact a fresh law that conforms to constitutional requirements and addresses the deficiencies identified in the judgment, particularly by ensuring that any levy is based on constitutionally permissible standards rather than presumed production.
The High Court partly allowed the batch of writ petitions, upheld Parliament’s legislative competence to impose a cess.
The court declared the capacity-based levy under the Health Security se National Security Cess Act, 2025 unconstitutional for violating Article 14.
The court struck down the Health Security se National Security Cess Rules, 2026 and the related notifications.
The court clarified that the judgment would not prevent the Union Government from enacting a constitutionally valid replacement law and disposed of one connected writ petition as withdrawn.
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