The Karnataka High Court struck down the Health Security Act under the State Security Act, 2025

Karnataka High Court View | Photo Credit: Photo File

The Karnataka High Court struck down the National Security Cess Act, 2025 and related rules, holding that the method of levying tax on pan masala manufacturers based on the assumed production capacity of the machines and not the actual output is unconstitutional and violative of Article 14 of the Constitution of India.

While upholding the legislative power of Parliament to impose such a cess, the court granted liberty to the Union government to enact new legislation to levy cess in accordance with the constitutional principles outlined in the judgment.

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

Not on the product, but on the machine

Observing that the cess is not on the product but on the machinery 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 led to a serious discrepancy and this discrepancy bordered on arbitrariness under Article 14.

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

No rational classification

The court also emphasized that a manufacturer with a machine capable of producing 100 bags per minute would be required to pay the same tax as a manufacturer whose machine could produce 500 bags per minute. This lack of rational classification and presumption of eligibility are unequal, violating the equality clause of Article 14, the Court said.

The court also found fault with the rules governing abatement or exemption from enforcement payment, which allowed abatement only if the machine remained out of service continuously for 15 days or more. Benchmark noted that this arbitrary threshold ignored actual cases of shorter production stoppages due to breakdowns, raw material shortages or maintenance.

“The establishment of a minimum period of fifteen days is based only on the assumption that the assessees are likely to commit tax evasion. The administrative difficulties in preventing tax evasion cannot by themselves justify the establishment of such an arbitrary limit under the Rules,” the court said.

Published – 27 Jul 2026 23:36 IST