Health Security se National Security Cess Act, 2025, and Rules struck down for arbitrary levy on machinery capacity rather than actual production; constitutional validity of Parliament’s power upheld but cess imposition method declared unconstitutional.
In a significant judgment dated 13 July 2026, the Karnataka High Court, presided over by Justice M. Nagaprasanna, partially struck down the Health Security se National Security Cess Act, 2025, and the corresponding Rules of 2026, as unconstitutional for violating the equality clause under Article 14 of the Indian Constitution. The Act imposed a cess on machines used for manufacturing Pan Masala (Customs Tariff Item No. 2106 90 20) based on the maximum rated capacity of the machines rather than on actual production, leading to arbitrary and discriminatory taxation.
The petitioners, comprising various Pan Masala manufacturers and packers including M/s Dhariwal Industries Pvt. Ltd., challenged the validity of the cess law and rules, contending that the cess was levied on the assumed maximum output of machines regardless of their actual output, resulting in disproportionate tax burdens. They also challenged the Rules prescribing a minimum continuous suspension period of 15 days for cess abatement as arbitrary.
The Court acknowledged the legislative competence of Parliament to enact a cess under Entry 97 of List I of the Seventh Schedule, which provides residuary power to impose taxes not enumerated in other lists. The Court clarified that the cess is distinct from GST (Goods and Services Tax) and surcharges under Articles 246A and 271 respectively, and thus GST Council’s recommendations do not apply to the cess.
However, the Court found the method of cess computation deeply flawed. The Act taxed machine owners based on “deemed production” capacity rather than actual production, resulting in equal cess on machines with widely varying actual output. For example, manufacturers with machines capable of producing up to 500 pouches per minute had to pay the same cess even if their actual production was significantly less, creating manifest inequality and arbitrariness. The Court noted that the cess imposed on machinery sometimes exceeded the total Maximum Retail Price (MRP) of the Pan Masala produced, which was unsustainable and unreasonable.
Further, the Court struck down the rule limiting cess abatement to cases where machines remain non-operational for at least 15 continuous days. The Court held that such a minimum period ignores genuine cases of shorter suspensions caused by machinery breakdown, raw material shortages, or maintenance, thereby imposing an unfair burden. The Court rejected the government’s anti-evasion rationale for this threshold as insufficient to justify such arbitrariness.
Extensive references to Supreme Court precedents emphasized that taxation laws must adhere to reasonable classification and non-arbitrariness to pass muster under Article 14. The Court reiterated that taxing statutes are not immune from equality principles and must not treat un-equals equally or impose manifestly arbitrary burdens.
In conclusion, while upholding Parliament’s power to levy a cess for public health and national security purposes, the Court declared the impugned Act, Rules, and related notifications unconstitutional to the extent they violate Article 14. The Court allowed the Union Government liberty to re-enact legislation bearing in mind the observations on classification, rationality, and fairness.
This judgment is a landmark affirmation that even fiscal statutes must conform to constitutional equality guarantees, and that tax laws cannot impose arbitrary burdens disconnected from the actual economic activity.
Bottom line:-
Health Security se National Security Cess Act, 2025 imposing cess on machines used for manufacture of Pan Masala held unconstitutional for violating Article 14 of the Constitution due to arbitrary levy based on maximum rated capacity rather than actual production; Rules prescribing minimum 15-day continuous suspension period for abatement also arbitrary.
Statutory provision(s): Constitution of India Articles 14, 246, 246A, 248, 254, 266, 269A, 270, 271, 279A; Health Security se National Security Cess Act, 2025; Health Security se National Security Cess Rules, 2026; Central Goods and Services Tax Act, 2017; Integrated Goods and Services Tax Act, 2017; Customs Tariff Act, 1975 (Tariff Item 2106 90 20).
M/s Dhariwal Industries Pvt. Ltd. v. Union of India, (Karnataka) : Law Finder Doc id # 2947376
