State Legislature lacks competence to impose water tax on electricity generation as it constitutes a tax on production.

The State of Uttarakhand enacted "The Uttarakhand Water Tax on Electricity Generation Act, 2012," which levied a tax on the drawal of water for hydroelectric power generation

Multiple power companies challenged the Act’s constitutional validity, arguing the State lacked legislative competence as the tax was effectively on "electricity generation" (a Union subject) and violated prior Implementation Agreements promising tax exemptions

A Division Bench of the High Court delivered a split verdict on 25.10.2023: one judge upheld the Act, while the other struck it down as ultra vires.

Consequently, the matter was referred to a third judge—Justice Alok Kumar Verma—for a majority opinion

The court applied the "Doctrine of Pith and Substance" to determine the true nature of the legislation, distinguishing between the subject of a tax and its measure

It relied on M.P.V. Sundararamier Co. v. State of A.P. and State of W.B. v. Kesoram Industries Ltd., which establish that "taxing entries" are distinct from "general entries" and power to tax cannot be inferred from a general regulatory head like Entry 17 of List II

The court further applied the principle from Union of India v. H.S. Dhillon regarding the requirements for tax under Entry 49 List II

the legislature cannot abdicate "essential legislative functions" (like fixing tax rates) without sufficient policy guidelines

promissory estoppel cannot be pleaded against the legislature in the discharge of its functions

The Court analyzed the charging provisions (Sections 2, 12, and 17) and concluded that the "taxable event" was not the mere drawal of water, but specifically the drawal for electricity generation; thus, in pith and substance, it was a tax on electricity generation

The Court rejected the State’s reliance on Entry 17 (Water), Entry 45 (Land Revenue), and Entry 49 (Taxes on Lands) of List II, noting that water used for power generation does not constitute "land" for taxing purposes under the Seventh Schedule, nor can a taxing power be derived from Article 288, which is an enabling or exempting provision rather than a source of competence

Regarding Section 17, the Court found "excessive delegation" because the Act provided no minimum/maximum limits or guidelines for fixing tax rates, granting the executive unfettered power

the Court sided with the State on promissory estoppel, reasoning that a government’s contractual promise cannot tie the hands of the sovereign legislature

The Court further held that Section 17 of the Act suffers from unconstitutional excessive delegation

the plea of promissory estoppel was rejected as it does not apply against legislative action

The reference was answered in favor of striking down the Act, concurring with the view of Justice Ravindra Maithani