State Legislature Lacks Competence to Levy Water Tax on Electricity Generation via General Legislative Entries

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

Various power generating companies (appellants), including THDC, NHPC, and JPVL, challenged the constitutional validity of the Act before the High Court.

A Division Bench delivered a split verdict on October 25, 2023: the then Chief Justice upheld the Act, while Justice Ravindra Maithani struck it down as ultra vires.

The matter was subsequently referred to the current third judge for an opinion to resolve the tie.

The appellants argued that the State lacked legislative competence as the tax was effectively on electricity generation (List I), and that the State was barred by the doctrine of promissory estoppel due to prior implementation agreements exempting them from such levies.

1. Whether the State Legislature has the legislative competence to enact the Act under Entries 17, 18, 45, 49, or 50 of List II, or under Article 288 of the Constitution.

2. Whether the Act, in pith and substance, imposes a tax on the generation of electricity or on the drawal of water.

3. Whether Section 17 of the Act suffers from the vice of excessive delegation by granting unfettered power to the Executive to fix tax rates without guidelines.

4. Whether the State is barred from imposing the tax by the doctrine of promissory estoppel based on contractual agreements with the power companies.

The court applied the "Doctrine of Pith and Substance" to determine the true nature of the legislation despite its nomenclature.

It relied on Article 246 read with the Seventh Schedule, noting that "Taxation" is a distinct legislative field and cannot be derived from a general entry as an ancillary power (State of West Bengal v. Kesoram Industries Ltd.).

The court noted that Article 265 mandates that no tax be levied except by "authority of law," which requires legislative competence.

Regarding delegation, it applied the principle that while rate fixation can be delegated, the legislature must provide policy guidelines to avoid "excessive delegation."

Finally, it upheld the principle that there can be no promissory estoppel against the legislature in the exercise of its legislative functions (M/s Hero Motocorp Ltd. v. Union of India).

The Court analyzed the charging sections—Sections 2(f), 2(i), and 12—concluding that the taxable event is not the mere drawal of water, but specifically the drawal of water for electricity generation.

Consequently, the "pith and substance" of the tax is on electricity generation, a field not available to the State under List II.

The Court rejected the State's reliance on Entry 49 (tax on land) and Entry 50 (tax on mineral rights), holding that water consumption does not constitute a tax on "land units" and that the declaration of water as a "mineral" was context-specific to other statutes and not a universal rule.

On delegation, the Court found Section 17 to be "naked delegation" as it lacked any ceiling, floor, or policy guidelines for the Executive to fix tax rates.

Regarding promissory estoppel, the Court favored the view that while agreements might bind the State Government, they cannot interdict the Sovereign power of the State Legislature to enact laws.

The Court answered the reference by concurring with Justice Ravindra Maithani on the unconstitutionality of the Act, while concurring with the then Chief Justice that the plea of promissory estoppel cannot be used to challenge the legislature’s competence.