Karnataka High Court Strikes Down Pan Masala Cess: A Detailed Analysis of the Dhariwal Industries Pvt. Ltd. v. Union of India Judgment

INTRODCUTION

Imagine running a manufacturing unit where your monthly tax bill is nearly four times the total sale value of everything you produced that month. That is not a hypothetical, it is what happened to a group of Pan Masala manufacturers in Karnataka. In the Karnataka High Court Pan Masala Cess Judgment delivered in July 2026, the Karnataka High Court agreed that something was wrong. In M/s Dhariwal Industries Pvt. Ltd. v. Union of India, Justice M. Nagaprasanna declared the Health Security se National Security Cess Act, 2025 along with its Rules and notifications unconstitutional and ultra vires Article 14 of the Constitution.

The case brought together eight writ petitions filed by Pan Masala manufacturers and pouch-makers, challenging a new central cess the Union government introduced to fund national security and public health. On paper, it sounded reasonable. In practice, the way it was designed turned out to be problematic for Pan Masala manufacturers. In fact, the Act empowers the Central Government to add items in the list through notifications, hence in future other products may be levied under same act.

WHAT WAS THE FIGHT ABOUT?

Before this law, Pan Masala (Customs Tariff Item 2106 90 20) was already taxed heavily under GST, 28% GST plus a 32% compensation cess, later raised to 40% of MRP. In 2025, Parliament brought in a fresh cess, not on the product sold, but on the machines used to make it. The logic behind this was that a machine can’t be hidden the way sales figures can.

The Court had to answer two distinct questions:

• Does the Constitution allow the Parliament to bring in this kind of cess at all?
• Whether the mechanism used to calculate this particular cess is fair, or arbitrary?

THE PETITIONERS’ CASE

Senior advocate Sri G. Shivadass, for the manufacturers, argued that Parliament had no room to bring in this cess since Pan Masala was already taxed under GST (Article 246A), and a surcharge under Article 271 cannot apply to goods already covered by GST. More importantly, he argued that a cess cannot be levied on assumed or deemed production it must track what is actually manufactured, not what a machine could possibly produce running non-stop.

The numbers backed this up. Under the formula, any machine capable of up to 500 pouches per minute was taxed at the same flat rate whether it actually ran at 65 per minute or 500. The petitioners placed an illustration before the Court showing that a machine producing 65 pouches/minute, run 8 hours a day for 25 days, would make about 7,80,000 pouches with a total MRP of roughly ₹31.2 lakh yet the cess alone came to ₹1.01 crore, and total tax with GST reached ₹1.09 crore. 

The Rules granted relief from the cess only if a machine stayed shut for 15 continuous days or more. Shorter shutdowns, a breakdown, a raw-material shortage, routine maintenance got no relief, even though nothing was being produced. The Court called this out directly, rejecting the government’s anti-evasion justification, administrative difficulties in preventing tax evasion cannot, by themselves, justify the prescription of such an arbitrary threshold under the Rules.

COURT’S REASONING

On the core question of taxing capacity instead of actual output, the Court found no rational basis for charging the same cess to a manufacturer running a machine at 100 pouches a minute as to one running a machine at 500 pouches a minute, two very different production levels being taxed identically made no sense. To back this up, the Court drew on established Supreme Court precedent. In earlier cases like Moopil Nair v. State of Kerala and Haji K. Kutty Naha, the Supreme Court had struck down flat taxes that ignored real differences between taxpayers, a land tax that didn’t account for whether land actually earned income, and a building tax based only on floor area regardless of use or profitability. Both were held discriminatory for treating unequal situations as if they were equal. More recently, in CIT v. Pepsi Foods Ltd., the Supreme Court confirmed that a tax law can violate Article 14 not only through outright discrimination, but also because of its irrational design.

Applying this line of reasoning, the Karnataka High Court concluded that taxing machines of wildly different actual capacities at the same flat rate was exactly this kind of unequal treatment and therefore violated of Article 14.

CONCLUSION

The judgment lands in a clear middle ground. On whether Parliament has the power to bring in such a cess at all, the Court sided with the government, holding that “Entry 97 of List I vests the Parliament with the residuary power to legislate on any matter not enumerated in List II or List III, including the power to impose any tax not mentioned in either of those Lists.”

Further while deciding on how the cess was calculated, the Court ruled against the government stating “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, failing the tenets of Article 14 of the Constitution of India and to that extent, the Act is held to be unconstitutional.”

As a result, the Act, the Rules, and all four related notifications (dated 16.12.2025, 31.12.2025, 01.01.2026, and 30.01.2026) were struck down. Importantly, the Court left the door open for a redo, holding that this “will not come in the way of the revenue to promulgate the law, bearing in mind the observations made in the course of the order.”

For a complete understanding of the Court’s reasoning, view the official Karnataka High Court judgment.

Author: Gauri Gautam, B.Com. L.L.B, Institute of Law, Nirma University

REFERENCES

• Table of Cases

1. CIT v. Pepsi Foods Ltd., (2021) 7 S.C.C. 413 (India).
2. Dhariwal Indus. Pvt. Ltd. v. Union of India, W.P. No. 3157 of 2026 (Karn. H.C. July 13, 2026).
3. Jindal Stainless Ltd. v. State of Haryana, (2017) 12 S.C.C. 1 (India).
4. Kunnathat Thatehunni Moopil Nair v. State of Kerala, 1960 SCC OnLine SC 7 (India).
5. State of Kerala v. Haji K. Kutty Naha, 1968 SCC OnLine SC 122 (India).

• Constitutional Provisions

1. INDIA CONST. art. 14.
2. INDIA CONST. art. 246A.
3. INDIA CONST. art. 269A.
4. INDIA CONST. art. 271.

• Statutes and Rules

1. Central Goods and Services Tax Act, 2017, INDIA CODE (2017).
2. Health Security se National Security Cess Act, 2025, INDIA CODE (2025).
3. Health Security se National Security Cess Rules, 2026, INDIA CODE (2026).