State Legislature Incompetent to Levy Water Tax on Electricity Generation Due to Lack of Legislative Field

The State of Uttarakhand enacted "The Uttarakhand Water Tax on Electricity Generation Act, 2012," imposing a tax on water drawn for hydroelectric power generation

Various power generating companies (THDC, NHPC, etc.) challenged the Act's constitutional validity, arguing the State lacked legislative competence as the tax was effectively on "electricity generation," a field not reserved for States

A Division Bench delivered a split verdict on 25.10.2023: the Chief Justice upheld the Act, while Justice Maithani struck it down as ultra vires

The matter was referred to Justice Alok Kumar Verma to resolve the tie

The appellants also contended the tax violated "Restated Implementation Agreements" where the State promised not to impose such taxes

1. Whether the nature of the tax imposed by the Act is on the "drawal of water" or on the "generation of electricity," and whether the State Legislature possessed the competence to enact it under List II of the Seventh Schedule

2. Whether Section 17 of the Act suffers from the vice of "excessive delegation" by granting the State government unfettered power to fix tax rates without statutory guidelines

3. Whether the State is barred by the doctrine of "Promissory Estoppel" from levying the tax due to prior contractual exemptions in Implementation Agreements

The Court applied the Doctrine of Pith and Substance to determine the true nature of the legislation, regardless of its nomenclature

It relied on Article 246 regarding the distribution of legislative subjects and Article 265, which mandates that no tax be levied except by "authority of law"

The Court utilized the principle from State of W.B. v. Kesoram Industries Ltd., establishing that "taxation" is a distinct matter from general legislative entries and cannot be inferred as an ancillary power from a general entry like Entry 17 (Water)

Regarding delegation, it applied the rule that essential legislative functions (like fixing tax policy/limits) cannot be abdicated to the executive

Finally, it followed the principle from M/s Hero Motocorp Ltd. v. Union of India that there is no promissory estoppel against the legislature in the exercise of its legislative functions

The Court analyzed the charging sections (Sec 12, 17, 18, 19) and definitions (Sec 2(f), 2(i)) to conclude that the "taxable event" was not the mere drawal of water, but specifically the drawal of water for electricity generation

In pith and substance, this constituted a tax on electricity generation, for which there is no specific taxing entry in List II (State List)

The Court rejected the State's reliance on Entries 45, 49 (land tax), and 50 (mineral rights), sharpening the distinction that water in a flowing river cannot be taxed as "land" under Entry 49 for the purpose of electricity generation

Furthermore, Section 17 was found to be "naked delegation" because it gave the Executive the power to fix and vary rates without any upper limit or policy guidelines in the statute

Regarding promissory estoppel, while the Court agreed the Act was unconstitutional on competence, it sided with the Chief Justice’s view that a contract with the Executive cannot bind the subsequent legislative actions of a Sovereign State

The Court held that (1) the State lacks legislative competence to tax electricity generation as "taxation" must be traced to a specific taxing entry, not a general one; (2) Section 17 is void for excessive delegation; and (3) though the Act is unconstitutional, the plea of promissory estoppel cannot interdict the State’s legislative power. The reference was answered in favor of the appellants, effectively striking down the Act