Bengaluru: The Karnataka high court has struck down a cess levied on pan masala products by the Union govt based on the installed capacity of a manufacturer rather than the actual quantity of the output.The cess was levied under the Health Security se National Security Cess Act, 2025 and the related rules.The power of the Union govt to promulgate a law to levy cess is upheld. However, the manner in which the Act and the rules levy the cess is held to be unreasonable and vague and unconstitutional, Justice M Nagaprasanna observed in his order while partly allowing the petitions filed by Dhariwal Industries and others. Consequently, the rules are also held to be unconstitutional.In his detailed order passed on July 13, the judge, however, clarified that the decision would not prevent the Union govt from enacting a fresh law to levy the cess, provided it was in conformity with the observations made in the judgment.The petitioners, who are all pan masala manufacturers, had challenged the validity of the Act which was enforced in Feb 2026. The legislation sought to levy a capacity-based excise cess on items like pan masala to fund public health and national security.The levy of the cess on pan masala production was contemplated by factoring in the number of pan masala making machines a manufacturer held and the number of pan masala pouches the installed machines could produce in a day, instead of the actual number of pan masala pouches produced or sold.The central govt had strongly defended the methodology adopted for levy of the cess, claiming that the pan masala sector was notorious for tax evasion.The approach was meant to address such revenue leakage at its root, by moving the taxable event from transactions that could be suppressed to evade tax, to machine ownership, the court was told.The argument failed to convince the court as it pointed out that manufacturers using machines with lower production capacity were liable to pay the same cess as those using machines with higher production capacity, resulting in an arbitrary classification.Justice Nagaprasanna was of the view that the levy of cess on the machinery has led to grave discrepancy and the same borders upon arbitrariness.The impugned rules permit abatement only where the manufacturing activity remains suspended continuously for a period of 15 days. The rules fail to take into account suspension of manufacturing for periods shorter than 15 days, which may occur due to various reasons, including breakdown of machinery, non-availability of raw materials or labour, factory maintenance, and the like. Such circumstances may not necessarily continue beyond fifteen days. However, even in such cases, the petitioners are still liable to pay cess, thereby incurring further losses in addition to those already suffered on account of the suspension of manufacturing activity, the judge added.
