Apart from the fact that she didn't have dates for Sultan as they were clashing with Rangoon which she had committed for before the Yash Raj film came to her. Another important reason is that she didn't want to repeat what she has done in the past and what has become almost cult.
Her character, Datto in Tanu Weds Manu Returns was appreciated by one and all and became famous almost overnight. Apparently, the female character in sultan is again a haryanvi. When Kangana got to know about it, she was clear that she'll not repeat what she has already done in the past. She is very focused on experimenting with new characters and looks irrespective of the fate. This is how she wants to grow as an actor and provide new entertainment value to her audience like a true entertainer. That's also the reason why she explored the bash and carefree yet vulnerable character of Payal in Katti Batti. While the film didn't do great at the box office, her character was loved and appreciated.
For similar reasons, Kangana has also declined Queen 2. The character of Rani is something that has been explored so she didn't want to repeat it again. The reason she did Tanu Weds Manu Returns was because she had a new character to explore, Datto...which she did to perfection.
Well, we are happy to have someone who's so clear in their thought process and believes in doing exactly what they are here for....to entertain with something new every time.