Karnataka HC holds HSNS Cess framework unconstitutional due to manner of Cess calculation

 This Tax Alert summarizes a recent ruling of the Karnataka High Court (HC) ^[1] on the constitutional validity of Health Security se National Security Cess Act, 2025 (HSNS Cess Act), the Health Security se National Security Cess Rules, 2026 (HSNS Cess Rules) and the notifications issued thereunder.

The key observations of the HC are:

• The taxable event under the HSNS Cess framework is ownership or possession of installed machines and not supply of goods or services, which is the taxable event under GST. Accordingly, Article 246A of the Constitution, which deals with levy of GST, is not applicable. Further, the impugned levy is not a surcharge under Article 271.
• Article 246(1) read with Entry 97 of List I of the Seventh Schedule confers residuary legislative powers on Parliament, including the power to impose a tax not mentioned in List II or List III. Therefore, the challenge of lack of legislative competence is without merit.
• However, the cess liability is determined with reference to the maximum rated speed of the machine and corresponding weight of the specified goods packed in a pouch, tin or container. Machines operating on different production capacities within the same slab are required to pay the same cess.
• The manner in which the HSNS Cess Act and the HSNS Cess Rules levy the cess is unreasonable and vague, as it is based on assumption of quantity manufactured instead of actual quantity manufactured.

Basis above, while the HC upheld the Union Government’s power to promulgate a law to levy cess, it held that the HSNS Cess Act was unconstitutional to the extent the manner of levy and computation violated Article 14 of the Constitution.

Comments:

• Taxpayers engaged in similar businesses may need to reassess ongoing compliance and tax payment positions under the HSNS Cess law. Further, those who have discharged cess may evaluate the possibility of filing refund claims for amounts already paid, subject to unjust enrichment principles.
• It remains to be seen whether the Government challenges the HC ruling before the Supreme Court or amends the HSNS Cess Act and Rules in line with the observations of the court.
• Impact of this ruling may need to be tested in other cases involving levy mechanisms where tax or cess is computed on a presumptive, notional or deemed basis, rather than with reference to actual value, quantity, production or transaction realities.