Uttarakhand High Court Strikes Down Water Tax On Hydropower, Calls It Tax On Electricity Generation

The Uttarakhand High Court has struck down a state law that required hydropower companies to pay a tax for using river water to generate electricity, holding that the levy was effectively a tax on electricity generation, which the State cannot impose.

Deciding on a reference arising from an earlier split verdict, Justice Alok Kumar Verma opined:

“It has been found in the earlier analysis that the Act imposes a tax on the generation of electricity. The State Legislature is not competent to levy tax on the generation of electricity. Therefore, I am in full agreement with the conclusion of brother Ravindra Maithani, J. that the Act is ultra vires the Constitution.”

The law, titled the Uttarakhand Water Tax on Electricity Generation Act, 2012, imposed a charge based on the amount of water drawn for producing electricity.

The court observed that the tax was not attracted by mere use of water, but only when water was used to generate electricity, making electricity generation the real basis of the levy.

“In the impugned legislation, the liability to pay tax is founded in the charging section. As per the charging section, tax is imposed on the “User” and “User” is a person, who draws water for generation of electricity. Consequently, the mere drawing of water from any source does not attract tax under the Act. But, if the drawal of water is for the generation of the electricity, then it is a taxable event under the Act.”

Explaining how the true nature of a levy must be determined, the court observed:

“The nomenclature of a levy is not conclusive for deciding its true character, nature or validity with reference to the legislative competence. The doctrine of pith and substance determines the true character, nature, intent, content and effect of a tax law if it overlaps between Union and State Lists.”

The case arose from a batch of appeals and a writ petition filed by several hydropower companies, including THDC India Ltd., NHPC Ltd. and Jaiprakash Power Ventures Limited, challenging the validity of the law.

A Coordinate Bench had earlier upheld the Act. However, a Division Bench later delivered a split verdict, with the then Chief Justice Vipin Sanghi upholding the law and Justice Ravindra Maithani striking it down, leading to a reference before Justice Verma.

Before the court, the companies argued that the levy was, in substance, a tax on electricity generation and could not be justified under State powers relating to water or land. They also contended that Article 288 does not provide an independent source of taxing power and that the law gave the government unchecked authority to fix tax rates.

The State argued that the tax was on the drawal and use of water, traceable to Entries 17, 18, 45, 49 and 50 of the State List, and pointed out that it was calculated based on the volume of water used.

Rejecting this, the court held:

“Article 288 of the Constitution of India is not a source of legislative competence. Article 288 of the Constitution applies only to such entities, which are clearly defined under this Article. Article 288 of the Constitution merely makes provisions for water or electricity in special context. The law is settled that the legislative competence may not be implied or inferred to. Article 288 (2) is an enabling provision, but, the conditions of this provision in relation of the Act are also not fulfilled.”

On the issue of excessive delegation, the court held that the law gave the executive unfettered power to fix tax rates without any guidance.

“Section 17 of the Act makes excessive delegation of power for fixing rates by the State Government and it delegates such power without any policy guidelines and the impugned tax under the Act is on the generation of electricity.”

On promissory estoppel, the court held that there can be no estoppel against the legislature in the exercise of its legislative functions and found no exceptional grounds to apply the doctrine.

The court ultimately declared the law unconstitutional and struck it down.

For Appellant: Senior Advocate Sanjay Jain, assisted by Advocate Shobhit Saharia, Advocate Padmesh Mishra, Advocate Harshita Sukhija, Advocate Palak Jain and Advocate Nishank Tripathi for THDC India Ltd. in SPA No.149 of 2021.

For Respondents: Senior Advocate Dinesh Dwivedi, assisted by Advocate Prateek Dwivedi, Advocate Shivam Singh, Deputy Advocate General T.S. Bisht and Standing Counsel V.D. Bisen for the State of Uttarakhand. Standing Counsel Rajesh Sharma and Standing Counsel Saurav Adhikari for the Union of India. Standing Counsel I.D. Paliwal for the State of Uttar Pradesh.