State Legislature Lacks Competence to Levy Water Tax on Hydroelectric Power Generation as a Tax on Electricity.

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

Various power generating companies (THDC, NHPC, etc.) challenged the constitutional validity of the Act, arguing that the State Legislature lacked the competence to tax electricity generation, a field allegedly occupied by the Union

A Division Bench of the High Court delivered a split verdict on 25.10.2023: the then Chief Justice upheld the Act, while Justice Ravindra Maithani struck it down as ultra vires. Consequently, the matter was referred to a third judge (Justice Alok Kumar Verma) for a majority opinion

1. Whether the State Legislature possessed the legislative competence under the Seventh Schedule or Article 288 of the Constitution to enact a law taxing the drawal of water for electricity generation

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

3. Whether Section 17 of the Act suffers from the vice of excessive delegation by granting the Government unfettered power to fix tax rates

4. Whether the State is barred by the doctrine of Promissory Estoppel from levying the tax due to prior implementation agreements with the appellants

The Court applied the doctrine of "Pith and Substance" to determine the true nature of the legislation, noting that the nomenclature of a levy is not conclusive of its character

It relied on M.P.V. Sundararamier and Co. v. State of A.P. and State of W.B. v. Kesoram Industries Ltd., which establish that "Taxation" is a distinct matter and the power to tax cannot be derived from a general (non-taxing) entry

The Court further applied the doctrine of "Excessive Delegation," holding that an essential legislative function, such as fixing tax rates, cannot be delegated without sufficient policy guidelines as per Union of India v. M/s Mohit Minerals Pvt. Ltd.

Regarding promissory estoppel, it followed M/s Hero Motocorp Ltd. v. Union of India, which holds there is no estoppel against the legislature's exercise of legislative functions

The Court analyzed the charging provisions (Sections 2(f), 12, and 17) and concluded that the taxable event was not the mere drawal of water, but specifically the drawal of water for the generation of electricity

Under the doctrine of pith and substance, the Court held the tax was actually on electricity generation, for which the State lacks competence as there is no specific taxing entry for water in List II

The Court rejected the State's reliance on Entries 17, 45, 49, and 50 of List II, noting that water cannot be categorized as "land" or "minerals" for the purpose of taxing electricity generation

On delegation, the Court found Section 17 provided "naked delegation" of power to fix rates without any upper limits or policy guidelines, rendering it unconstitutional

However, the Court sided with the then Chief Justice on the point of promissory estoppel, finding that contractual exemptions by the Executive cannot bind the State Legislature from exercising its plenary powers

The Court held that the tax is in pith and substance a tax on electricity generation, which exceeds the State’s legislative competence, and Section 17 is void for excessive delegation. However, the plea of promissory estoppel was rejected, as it cannot be invoked against legislative functions. The reference was answered in favor of the appellants