State Legislature Lacks Competence to Levy Water Tax on the Generation of Electricity

The State of Uttarakhand enacted "The Uttarakhand Water Tax on Electricity Generation Act, 2012," which authorized the levy of a water tax on "users" drawing water from sources within the state for the purpose of generating electricity

Multiple hydroelectric power companies challenged the Act’s constitutional validity, arguing it was a colorable exercise of power to tax electricity generation—a field reserved for the Union—and that it violated Prior Implementation Agreements (IAs) which promised tax exemptions

A Division Bench of the Uttarakhand 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

The matter was subsequently referred to Justice Alok Kumar Verma for a tie-breaking opinion

1. Whether the tax imposed by the Act is, in pith and substance, a tax on "drawal of water" or a tax on the "generation of electricity"

2. Whether the State Legislature possessed the competence to enact the tax under Entries 17, 18, 45, 49, or 50 of List II or under Article 288 of the Constitution

3. Whether Section 17 of the Act suffers from the vice of excessive delegation for failing to provide guidelines for fixing tax rates

4. Whether the State is barred by the doctrine of promissory estoppel from levying the tax due to pre-existing contractual exemptions

The court applied the "Doctrine of Pith and Substance" to determine the true nature of the levy regardless of its nomenclature

It relied on Article 246 and the Seventh Schedule, noting that "taxation" is a distinct field and power to tax cannot be inferred from general entries (State of W.B. v. Kesoram Industries Ltd.)

The court also applied Article 265, which mandates that no tax be levied without the authority of law

Regarding delegation, it held that fixing tax rates without legislative guidelines or limits constitutes "excessive delegation"

Finally, it applied the principle that there is 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 provisions (Sections 2(f), 2(i), and 12), finding that the taxable event was not the mere drawal of water, but the drawal specifically for electricity generation; thus, in pith and substance, it was a tax on generation

It rejected the State’s reliance on Entry 49 (Taxes on land) and Entry 50 (Mineral rights), clarifying that water is not "land" for taxation purposes and the state cannot derive taxing power from general entries like Entry 17 (Water)

Regarding Article 288, the court held it is a provision for exemption/limitation and not an independent source of legislative competence

Justice Verma found Section 17 unconstitutional as it granted the Executive unfettered power to fix and vary tax rates without any policy guidelines or upper limits

However, on the issue of promissory estoppel, the court ruled that while the State Government might be bound by its contracts, the State Legislature cannot be interdicted from exercising its sovereign taxing power by a prior agreement

The reference was answered by declaring "The Uttarakhand Water Tax on Electricity Generation Act, 2012" unconstitutional.

The court rejected the appellants’ plea on "promissory estoppel," holding that no such estoppel operates against a legislative act