The Karnataka High Court has declared key provisions of the Health Security-cum-National Security Cess Act, 2025 and the accompanying Rules unconstitutional, holding that the method adopted to calculate cess on pan masala manufacturers was arbitrary and violated Article 14 of the Constitution. At the same time, the Court clarified that Parliament has the constitutional authority to enact a law imposing a cess, but such a levy must be based on a constitutionally valid framework.
Justice M. Nagaprasanna delivered the judgment on 13 July 2026 in a batch of writ petitions led by M/s Dhariwal Industries Pvt. Ltd. v. Union of India.
Background of the Case
The petitioners, including several pan masala manufacturers, challenged the constitutional validity of the Health Security-cum-National Security Cess Act, 2025, the Health Security-cum-National Security Cess Rules, 2026, and related government notifications.
They argued that the new cess was calculated on the basis of the production capacity of pouch packing machines instead of the actual quantity of pan masala manufactured. According to them, this resulted in an unreasonable and arbitrary tax burden and violated Articles 14 and 19(1)(g) of the Constitution. They also questioned Parliament's legislative competence to enact such a law after the introduction of the GST regime.
The Union Government defended the legislation by contending that the cess was neither GST nor a surcharge. It argued that the measure was introduced to curb tax evasion in the pan masala sector and to generate revenue for public health and national security. The Government maintained that the levy was linked to machine ownership rather than the supply of goods and therefore fell outside the GST framework.
Court's Observations
After examining the constitutional provisions and the scheme of the legislation, the High Court rejected the argument that Parliament lacked the power to enact the cess law.
Justice Nagaprasanna held that Parliament possesses residuary legislative power under Article 246(1) read with Entry 97 of List I of the Seventh Schedule to impose a cess of this nature. The Court found that the impugned cess was neither a GST under Article 246A nor a surcharge under Article 271. Therefore, the challenge to Parliament's legislative competence failed.
However, the Court found serious flaws in the method adopted for levying the cess.
It noted that the Act effectively assumed the quantity of production by linking the levy to the installed machine capacity instead of the actual production. The Court observed that manufacturers with different levels of actual production could end up paying the same cess merely because they owned similar machines.
Referring to Supreme Court precedents on equality under Article 14, the Court concluded that such a classification lacked a reasonable basis and resulted in discrimination.
The bench observed:
“The manner in which the Act and the Rules levy the cess is held to be unreasonable and vague, as it is based on assumption of quantity manufactured instead of actual quantity manufactured.”
The Court also rejected the Government's justification that newer machines with higher capacity had entered the market, observing that such developments could not cure the constitutional defects in the legislation.
Court's Decision
Allowing the petitions in part, the Karnataka High Court upheld the Union Government's constitutional power to enact a cess law but declared the present Act and Rules unconstitutional to the extent they imposed cess based on presumed or deemed production rather than actual production.
As a consequence, the Court also struck down the notifications dated 16 December 2025, 31 December 2025, 1 January 2026, and 30 January 2026 issued under the Act. At the same time, it granted liberty to the Union Government to enact a fresh law consistent with the constitutional principles discussed in the judgment.
One connected writ petition was disposed of as withdrawn.
Case Details
Case Title: M/s Dhariwal Industries Pvt. Ltd. v. Union of India & Connected Matters
Case Number: Writ Petition No. 3157 of 2026 (T-RES) with connected writ petitions
Judge: Justice M. Nagaprasanna
Decision Date: 13 July 2026
