TaxTMI 
TaxTMI 
CESS ON PAN MASALA- MISBORN ACT
X X X X Extracts X X X X
X X X X Extracts X X X X
....ESS ON PAN MASALA- MISBORN ACT<br>By: - Sadanand Bulbule<br>Goods and Services Tax - GST<br>Dated:- 5-8-2026<br>1. The recent ruling of the Hon'ble High Court of Karnataka in M/s. Dhariwal Industries Pvt. Ltd., M/s. Shivam Industries, M/s. Shri Tirupati Industries, M/s. Shashhi Shekhar Enterprises, M/s. Raj Pouches, M/s. V.K. Packers, M/s. Ghodawat Fresheners LLP, M/s. R.K. Pan Masala Pvt. Ltd., Versus Union of India, Through The Secretary, Ministry of Finance (Department of Revenue), New Delhi, Central Board of Indirect Taxes And Customs New Delhi. - 2026 (7) TMI 1751 - KARNATAKA HIGH COURT brings into sharp relief a persistent policy contradiction: the delicate balance between public health mandates, fiscal policy, and cons....
X X X X Extracts X X X X
X X X X Extracts X X X X
....titutional governance. By declaring the capacity-based levy under the Health Security se National Security Cess Act, 2025 unconstitutional under Article 14, the judiciary re-anchored fiscal enforcement to fundamental rights. The judgment stands as a classic demonstration of a cardinal principle in statutory drafting and public governance: the remedy must not be worse than the disease. 2. Before the Hon'ble High Court, the Revenue argued that pan masala poses severe health risks and operates in a sector notoriously prone to tax evasion. To plug revenue leakages and fund national security and public health initiatives, Parliament chose to tax the deemed production capacity of pouch-packing machines rather than actual production of pan ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....masala. While the Hon'ble High Court recognized Parliament's broad legislative power under the residuary entry (List I, Entry 97) to enact a cess, it struck down the operational mechanism. By grouping machines with widely varying actual outputs-such as those producing 65 or 100 pouches per minute-into the exact same tax bracket as those producing 500 per minute, the law treated unequals equally. Citing established precedents like Kunnathat Thathunni Moopil Nair and Haji K. Kutty Naha, the Court reaffirmed that fiscal legislation is not immune from the guarantees of equality under Article 14. Furthermore, restricting tax abatement strictly to continuous operational shutdowns of 15 days or more was held to be manifestly arbitrary. The....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... rule penalised legitimate, short-term disruptions-such as machine breakdowns or raw material shortages-based on a sweeping presumption of tax evasion. 3. The flaw in the impugned Act lay in its operational design. In an effort to cure the "disease" of tax evasion, the State introduced a "remedy" that created systemic inequities: For smaller or lower-capacity manufacturers, computing cess on deemed capacity rather than actual production yielded tax liabilities that outstripped the total retail market value of their output. To catch evaders, the law created a levy so onerous that it rendered genuine operations non-viable. Prescribing a rigid 15-day threshold for abatement assumed that any shorter stoppage was inherently bogus. Administrat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ive difficulty in verifying claims cannot justify denying relief for genuine operational breakdowns. Moving the taxable event from actual supply transactions to machine ownership was designed for administrative convenience. However, convenience cannot supersede constitutional standards of rational classification and fairness. 4. When the State admits before a court of law that an entire industry is "notoriously prone to tax evasion," a troubling question arises: Why does the State repeatedly fail to contain it? This institutional struggle stems from several deeply entrenched structural factors: Combining ad-valorem GST, compensation cesses, and specialized levies creates an effective tax incidence approaching 80-90% of the retail price. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....When taxes constitute nearly the entire cost of a product, the profit margin for evading tax becomes astronomical, funding sophisticated illicit supply chains. Unlike goods sold through corporate supply chains, pan masala flows into hundreds of thousands of informal, cash-driven micro-retailers. 5. In a market where end-consumers rarely demand a tax invoice, standard transaction-based GST auditing breaks down. High-speed pouch-packing machines can be easily installed, moved, or operated off the books. Furthermore, primary inputs like betel nut, catechu, and lime are unbranded agricultural commodities that can be procured without invoices, making input-output matching exceptionally difficult. When standard transaction monitoring fails, th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e State often resorts to "blunt force" statutory tools-such as taxing deemed machine capacity. However, as the Karnataka High Court emphasized, sacrificing constitutional equity for administrative ease inevitably leads to judicial invalidation. 6. Why regulate and tax a recognized public health hazard through complex fiscal laws rather than banning its manufacture directly? The prohibition view critics argue that collecting revenue from hazardous commodities to fund health services creates an uncomfortable dependence. The State relies on the continued consumption of harmful goods to finance the very infrastructure needed to treat their consequences. If a commodity's health risks are as severe as the State admits in court, permitting ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....its commercial production under a tax umbrella creates a moral contradiction. Conversely, practical economics demonstrates that total bans on addictive commodities rarely eliminate consumption. Instead, prohibitions frequently drive supply chains into unregulated black markets, remove quality controls, and enrich illicit syndicates while stripping the State of regulatory oversight. From this perspective, high taxation acts as a price-discouragement mechanism meant to suppress demand while keeping supply chains visible. 7. The ruling in M/s. Dhariwal Industries ( supra) offers a clear standard for state policy: A. Measures aimed at curbing tax evasion must rely on verifiable operational metrics rather than rigid presumption....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s that burden smaller and larger operators alike. B. Addressing tax evasion requires robust, technology-driven supply chain tracking and field verification rather than artificial "deemed production" formulas that fail tests of rational classification. C. Public health safeguards must remain direct and proactive, rather than relying on revenue generated by harmful commodities. The Hon'ble High Court's ruling reinforces a core constitutional mandate: even when regulating harmful industries or combating tax evasion, the State must act strictly within the bounds of constitutional fairness. 8. There is a striking irony in seeing screen icons-who preach discipline, morning workouts, and social and moral virtue o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n social media-flashing million-dollar smiles to promote surrogate brands for cancer-causing pan masala. Standing beneath crystal chandeliers, these celebrities claim to endorse mere "Bolo Zooban", "Saffron cardamom,", "Silver Elaichi/pearls" hiding behind the thin veil of surrogate advertising while endorsing the exact logos, colours, and styling of lethal tobacco products. On screen, they play righteous heroes fighting evil; off screen, they lend their immense influence to entice millions into addiction, reducing public health to a punchline for a lucrative fee. 9. When the government admits in court that these commodities cause severe health crises and foster massive tax evasion, yet fails to contain them, a disturbing question arises....
X X X X Extracts X X X X
X X X X Extracts X X X X
....: who is left to stop this trade? In a cruel twist of logic, the burden of restraint is shifted entirely onto the consumer-the daily-wage worker, the student, and the driver. We expect the ordinary citizen to display the moral fortitude and willpower that wealthy, privileged icons surrender for an endorsement check. Expecting the public to resist millions of dollars in manipulative, slow-motion marketing while celebrities pocket the profits is the ultimate triumph of corporate and celebrity hypocrisy. 10. The state's approach to "sin goods"-whether pan masala or Indian Made Foreign Liquor (IMFL)-reveals a deep policy hypocrisy: it is akin to building a distillery and a de-addiction centre within the exact same compound wall. With one....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... hand, the state relies heavily on the massive revenues generated by commodities it publicly acknowledges as lethal health hazards and hotbeds of tax evasion. With the other hand, it earmarks a fraction of those very revenues to fund public health initiatives and national security, claiming the moral high ground of social welfare. The state constructs a self-sustaining cycle where the hazard is allowed to flourish so that its tax yields can finance the treatment of its own catastrophic consequences. Conclusion: When this structural addiction to "sin revenue" is paired with aggressive, arbitrary tax enforcement-such as levying cess on assumed machine capacity rather than actual output-the state creates a remedy far worse than the disea....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se. As the Hon'ble High Court of Karnataka reaffirmed in M/s. Dhariwal Industries Pvt. Ltd., M/s. Shivam Industries, M/s. Shri Tirupati Industries, M/s. Shashhi Shekhar Enterprises, M/s. Raj Pouches, M/s. V.K. Packers, M/s. Ghodawat Fresheners LLP, M/s. R.K. Pan Masala Pvt. Ltd., Versus Union of India, Through The Secretary, Ministry of Finance (Department of Revenue), New Delhi, Central Board of Indirect Taxes And Customs New Delhi. - 2026 (7) TMI 1751 - KARNATAKA HIGH COURT, administrative convenience and revenue hunger can never supersede constitutional fairness under Article 14. If the state is genuinely committed to public health and the rule of law, it must step off this moral seesaw. True governance requires choosing between....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... direct, honest public health protection and transparent, constitutional tax reinforced enforcement-rather than attempting to balance both through the hypocritical gates of sin taxation. =============<br> Scholarly articles for knowledge sharing by authors, experts, professionals ....