J&K HC Strikes Down Water-Use Levy On Hydropower Projects As An Unauthorised Tax On Electricity Generation

The petitioners, independent power producers operating hydropower projects in Jammu and Kashmir, challenged provisions of the Jammu and Kashmir Water Resources (Regulation and Management) Act, 2010 and related demand notices seeking water-usage charges for electricity generation.

The notices were issued under the Act from 2010 onwards.

The petitioners contended that the levy was, in substance, a tax on electricity generation, which the State Legislature lacked competence to impose; the Union of India supported that position, while the UT defended the levy as a regulatory charge for water use.

The petitions were heard together because they raised common questions of law and fact.

The Court applied Articles 245, 246, 248 and 265 of the Constitution and the relevant Seventh Schedule entries, including Entries 17, 49, 50 and 53 of List II, Entry 84 of List I as it then stood, and the residuary powers applicable to the erstwhile State of Jammu and Kashmir.

It relied on the principles that a levy’s true character is determined by its substance, taxable event and incidence—not its label; that a fee requires a relationship between the levy and services rendered, unlike a tax; and that legislative competence over taxation must be found in a specific taxing entry, not inferred from a general regulatory entry.

The Court drew on Hingir-Rampur Coal Co. Ltd. v. State of Orissa, AIR 1961 SC 459; Jalkal Vibhag Nagar Nigam v. Pradeshiya Industrial and Investment Corporation, (2021) 12 SCR 210; Municipal Council, Kota v. Delhi Cloth and General Mills Co. Ltd., (2001) 3 SCC 654; Mineral Area Development Authority v. Steel Authority of India, (2024) 10 SCC 1; State of Andhra Pradesh v. National Thermal Power Corporation Ltd., (2002) 5 SCC 203; M.P. Cements Manufacturers Association v. State of Madhya Pradesh, (2004) 2 SCC 249; and National Hydro-Electric Power Corp. Ltd. v. State of J&K, 2005 (2) JKJ [HC] 5.

The Court found that the levy on hydropower projects was not supported by corresponding services to those projects, and that the separate fund created under Section 185-A was earmarked for broader power-sector purposes. It therefore treated the levy as a tax rather than a fee or usage charge.

The tariff was calculated by reference to the water’s head height, rather than the quantity of water drawn or consumed; the Court considered that method a proxy for hydropower potential and concluded that the levy’s incidence was electricity generation.

Because the levy was in substance a tax on generation, the Court held that the erstwhile State Legislature lacked competence to impose it. It rejected the argument that adoption of the Act under the Jammu and Kashmir Reorganisation Act, 2019 cured the original lack of competence.

It held that the 2010 Act, insofar as it imposed water-usage charges on the petitioners’ hydropower projects, imposed a tax on electricity generation and was ultra vires the Constitution for want of legislative competence.

The impugned demand notices were quashed, and the UT was restrained from imposing a tax on electricity generation under the guise of water-usage charges or any other tax.