Karnataka High Court Voids Cess on Pan Masala: Key Insights
The Karnataka High Court recently declared a cess imposed on pan masala products by the Central government under the Health and National Security Cess Act, 2025, as unconstitutional. The judgment, delivered by Justice M Nagaprasanna, emphasized that the methodology of levying the cess was arbitrary and contravened Article 14 of the Indian Constitution, which ensures equality before the law.
In the case of Dhariwal Industries v Union of India & Ors, the court examined petitions from several pan masala manufacturers challenging the validity of the Health and National Security Cess Act, 2025. This Act, operational since February 2026, imposes a capacity-based excise cess on products like pan masala to support public health and national security initiatives. The contentious aspect of the Act was its imposition of the cess based on the number of machines a manufacturer possessed, rather than the actual amount of pan masala produced or sold.
The Central Revenue authorities defended the method, with Additional Solicitor General (ASG) N Venkataraman arguing that this approach was designed to curb tax evasion prevalent in the pan masala sector. The strategy aimed to shift the taxable event from potentially conceal-able transactions to machine ownership.
Despite these arguments, the court found the levy method arbitrary. In a hypothetical scenario, the court illustrated how a manufacturer with a machine capable of producing 65 pouches per minute would be compelled to pay ₹1.01 crore as cess based on presumed output, despite the actual maximum retail value of the produced pouches amounting to only ₹31.20 lakh.
The court also rejected the government’s defense that the Act included an abatement mechanism allowing manufacturers to seek cess reduction for machines inactive for at least fifteen consecutive days. It stated that this provision disregarded real-world production suspensions due to machinery breakdowns or other operational challenges, potentially leaving manufacturers liable for cess without actual production.
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Justice M Nagaprasanna asserted that the arbitrary classification of manufacturers based on machine capacity, without regard to actual production, violated constitutional principles. The judgment clarified that while the ruling invalidated the current cess levy method, it did not preclude the government from enacting new legislation compliant with constitutional standards.
Representing the petitioners were Senior Advocate G Shivadass and a team of advocates including Tarikar Praveen, Siddaling Reddy Patil, Prashant Shivadass, Rishab J, Sampath K Mutthalageri, and Sneha Suresh. ASG N Venkataraman, alongside Senior Standing Counsel Aravind V Chavan, represented the Union of India and the Central Board of Indirect Taxes and Customs.
