A close look at the Health Security se National Security Cess Act, 2025, its capacity-based levy on Pan masala manufacturing and the pending Delhi High Court challenge to its constitutional validity. Covers the meaning of a cess, how the Act’s compliance framework operates, and the legal arguments now before the Court.
Introduction
Imagine a pan masala manufacturer whose tax liability is no longer determined by actual sales or production volumes, but by the theoretical maximum speed of packing machines installed in the factory. A single high-speed pouch-packing machine, once an asset, now dictates a multi-crore monthly cess liability under the Health Security se National Security Cess Act, 2025, regardless of whether it operates at full capacity or sits idle.
This novel capacity-based levy, aimed at generating dedicated funds for public health and national security, has sparked intense debate. On 16 February 2026, a petition in Vinod J. Sharma v. Union of India & Ors. (W.P.(C) 2129/2026) challenged the constitutional validity of the Act before the Delhi High Court. The case raises fundamental questions about legislative competence post the 101st Constitutional Amendment and the arbitrariness of taxing potential rather than actual economic activity. But what exactly is this Act, and what does it entail?
The Health Security se National Security Cess Bill, 2025 was introduced in Lok Sabha on 1st December, 2025 and finally came into force on 1st February, 2026. In simple terms, it places a new charge (cess) on machinery installed or processes employed to manufacture or produce certain goods (Pan masala) on a manual or mechanical basis, with the stated purpose of creating a dedicated and predictable revenue stream to fund two national priorities: public health and national security. To understand what this really means, though, let us start with the basics- what a cess is, how it is different from a regular tax, and what this new levy means for Pan masala manufacturers.
What Is a Cess?
Courts use a simple test to spot a cess: does the levy have a specific, stated purpose, is the revenue generated directly linked to that purpose, and is the money kept separate or merged with the government’s general revenue. The Constitution itself does not define the term ‘cess’ and it is only mentioned in Article 270 in the manner ‘any ‘cess‘ levied for specific purposes under ‘any law‘ made by Parliament’. A cess is not a standalone tax, it is added on top of taxes that already exists. But unlike a regular tax, which the government can spend on anything, a cess is tied to one earmarked purpose. The Education Cess and Swachh Bharat Cess from earlier years are classic examples. The Health Security se National Security Cess Act, 2025 fits this test on paper, as its proceeds are earmarked and credited to the Consolidated Fund of India.
Section 4
Section 4 of the act defines cess as separate and distinct from any other duty or tax already payable, and ties its proceeds to two specific purposes named in the Act itself. It is charged in addition to the GST and excise duty a pan masala manufacturer already pays. This cess operates in addition to the enhanced 40% GST rate on retail sale price (RSP), maintaining an overall high tax incidence post-abolition of the compensation cess. The revenue is credited to the Consolidated Fund of India.
One thing which makes this Act unusual is that most taxes, including GST are charged on the value or quantity of what is sold. This one is not. Instead of taxing how much Pan masala a manufacture actually sells, it taxes the capacity of the machines used to make it, calculated from things like machine speed and installed capacity, regardless of how much of that capacity is actually used in a given month. This is what’s called a capacity-based levy, and it is a fairly new way of structuring tax in India.
Structural Framework
Structurally, the Act is organised into nine chapters, moving from basic definitions all the way through enforcement and appeals. Its scope, for now, is limited to Pan masala. But, the Act empowers Central Government to notify additional goods later, without needing to return to Parliament for a fresh law every time, though no cess can actually be charged on any product until it is specifically notified. So, while the Pan masala is only taxed today, the list is inexhaustible.
Who has to pay: Chapter II defines the “taxable person” broadly covering anyone who owns or runs the machinery, whether they operate it themselves or get workers or contractors to do it. Everyone in that chain has to register with the tax department and declare details about their machines upfront.
How it is paid: Manufacturers work out their own cess liability and pay it every month, on top of the GST compliance requirements and excise duty they already pay. Paying GST does not reduce what they owe under this Act, it is an extra, separate payment. The department can also audit and reassess if something looks off.
How much control the government has: The Centre can double the tax rate if circumstances call for it and can also exempt certain manufacturers and add new products to the list, all through notification without going back to the Parliament. This is one of the debated parts of the law, since it gives the executive a lot of room to adjust things on its own.
Penalty provisions: The following table summarises the penalties for non-compliance:
| VIOLATION | CONSEQUENCE |
| Failing to register as a taxable person | Penalty of ₹10,000, or the cess amount involved, whichever is higher |
| Failing to pay cess within the specified time | Penalty of ₹10,000, or the cess evaded, whichever is higher |
| Operating machinery/processes without declaring them | Penalty of ₹10,000, or the cess payable, whichever is higher |
| Disposing of or tampering with goods that have been lawfully seized | Penalty of ₹10,000, or the cess amount involved, whichever is higher |
| Aiding or abetting any of the above offences | Penalty of up to ₹1,00,000 |
| Fraud, wilful misstatement, or suppression involving evasion above ₹1 crore | Criminal prosecution, imprisonment between 1 and 5 years, a fine, or both |
Note: Penalties and pre-deposit requirements are as per the Act and Rules.
Process of Appeal under HSNS Act:
| STAGE | BODY | CONDITION |
| 1 | Appellate Authority | First point of appeal against an adjudication order |
| 2 | Appellate Tribunal (CESTAT) | Next level if unsatisfied with the Appellate Authority’s order |
| 3 | High Court | Only on a substantial question of law; must be filed within 180 days; heard by a bench of at least two judges |
| 4 | Supreme Court | Final level of appeal |
Pre-deposit condition for filing an appeal:
| REQUIREMENT | DETAIL |
| Admitted amount | Must be paid in full before the appeal is entertained |
| Disputed amount | 10% of the remaining disputed cess must be deposited, subject to a cap of ₹25 crore |
This act encompasses a full-fledged compliance system, adding one more layer to the Indian Tax regime.
The Act is supplemented by the Health Security se National Security Cess Rules, 2026, which detail mandatory registration (per factory), self-declaration and verification of machines/processes, monthly cess payment, abatement for prolonged stoppages, and monitoring mechanisms
Debate Around the Validity
In Vinod J Sharma vs Union Of India & Ors on 16 February, 2026 vide Case No. W.P.(C) 2129/2026, the petitioner has challenged the constitutional validity of the concerned statute, particularly Schedule II, framed under Sections 2(o), 4(1), 5 and 6 on grounds of legislative incompetence and arbitrariness. Relying on the Constitution (One Hundred and First Amendment) Act, 2016, which limited the Union’s excise power under Entry 84, List I to a few specified goods (including tobacco and tobacco products) and moved everything else into GST, the petitioner argues that since Pan masala under Section 2(j) is not itself “tobacco or tobacco products,” Parliament cannot bring it back, in the form of a “cess,”
The petitioner further argues that the Act is arbitrary and violates Article 14 and 19(1)(g), since Schedule II calculates the cess from a machine’s rated speed and pouch weight rather than the actual production, which is unrelated to real output and places an unreasonable burden on the trade.
For more updates on significant legal and regulatory developments affecting businesses in India, explore our Legal Updates.
Conclusion
The Health Security se National Security Cess Act, 2025 introduces a novel capacity-based levy on Pan masala manufacturing, and its validity is now before the Delhi High Court. The outcome in Vinod J. Sharma will be significant for clarifying Parliament’s taxing powers in the post-GST era, particularly the permissible scope of purpose-specific cesses and capacity-based levies. Until resolved, manufacturers must ensure strict compliance to avoid severe penalties.
Author details: Gauri Gautam, B.COM. L.L.B, Institute of Law, Nirma University
References
- IND. CONST. art. 14.
- IND. CONST. art. 19, cl. 1(g).
- IND. CONST. art. 270, cl. 1.
- IND. CONST. sch. VII, list I, entry 84.
- Vinod J. Sharma v. Union of India, W.P.(C) No. 2129/2026 (Del. H.C. filed Feb. 16, 2026) (petition pending).
- The Health Security se National Security Cess Act, No. 35 of 2025, India Code, https://www.indiacode.nic.in/bitstream/123456789/22084/1/a2025-35.pdf.
- The Constitution (One Hundred and First Amendment) Act, 2016, https://prsindia.org/files/bills_acts/acts_parliament/2016/the-constitution-(101-amendment)-act,-2016.pdf.
- PRS Legislative Research, The Health Security se National Security Cess Bill, 2025, https://prsindia.org/billtrack/the-health-security-se-national-security-cess-bill-2025 (last visited July 23, 2026).
Discover more from J.P. Associates
Subscribe to get the latest posts sent to your email.