Karnataka High Court strikes down Health Security se National Security Cess Act, 2025

The High Court of Karnataka has struck down the Health Security se National Security Cess Act, 2025, and the associated Rules, holding that the method of levying cess on pan masala manufacturers based on the assumed production capacity of machines, rather than actual output, is unconstitutional and violates Article 14 of the Constitution of India.

While upholding the Parliament’s legislative competence to impose such a cess, the Court granted liberty to the Union government to enact fresh legislation to levy cess in conformity with the constitutional principles outlined in the judgement.

Justice M. Nagaprasanna passed the order recently while partly allowing the petitions filed by M/s Dhariwal Industries Pvt. Ltd., Bengaluru, and others challenging the Act and the Rules.

Not on product, but machine

Noticing that the levy of cess is not on the product but on the machines used for the purpose of the product and the capacity that the machine would generate, the Court said that the levy of cess on the machinery has led to grave discrepancy and this discrepancy borders upon arbitrariness under Article 14.

The Court, in its reasoning, used a hypothetical calculation to illustrate the law’s arbitrariness. For a machine capable of producing 65 pouches per minute, the total cess liability under the Act for a month was ₹1.01 crore. When combined with GST, the total tax burden would be ₹1.09 crore when the total maximum retail value of the pouches produced would be just ₹31.20 lakh, the Court pointed out.

No rational classification

The Court also highlighted that a manufacturer with a machine capable of producing 100 pouches per minute would be liable to pay the same cess as one whose machine could produce 500 pouches per minute. This lack of a rational classification and the presumption of capacity treated unequals equally, thereby violating the equality clause under Article 14, the Court said.

The Court also found fault with the Rules governing abatement or relief from cess payment, which allowed for a reduction only if a machine remained inoperative for a continuous period of 15 days or more. The bench noted that this arbitrary threshold ignored genuine cases of shorter production halts due to breakdowns, lack of raw materials, 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.