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

Various hydroelectric power corporations challenged the constitutional validity of the "Uttarakhand Water Tax on Electricity Generation Act, 2012," which imposed a tax on water drawn for power generation

The appellants argued that they had entered into Implementation Agreements (IAs) with the State, which promised exemptions from any such taxes or royalties

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

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

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

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

3. Whether Section 17 of the Act constitutes "excessive delegation" by allowing the executive to fix tax rates without legislative guidelines

4. Whether the State was barred by the doctrine of "Promissory Estoppel" due to prior contractual exemptions

The Court applied the Doctrine of Pith and Substance to determine the true nature of the levy, holding that the nomenclature of a tax is not conclusive

It relied on Article 246 read with the Seventh Schedule, noting that taxing entries are distinct from general entries and the power to tax cannot be inferred from a general entry (State of W.B. v. Kesoram Industries Ltd.)

The Court applied Article 265, which mandates that no tax be levied except by authority of law

principle from Union of India v. H.S. Dhillon regarding the specific requirements for taxes under Entry 49 List II

Regarding Promissory Estoppel, the Court followed Hero Motocorp Ltd. v. Union of India, which establishes that estoppel cannot be pleaded against the legislature or the exercise of legislative functions

The Court found that while the State claimed the tax was on "water drawal" (Entries 17 or 49), the Act’s charging section only triggered liability when water was drawn specifically for "generation of electricity"

Under the "pith and substance" rule, the taxable event was identified as electricity generation, a field not available to the State under List II

The Court rejected the State's reliance on Entry 49 (land) and Entry 50 (minerals), clarifying that water is not "land" for the purpose of a unit-based tax

the characterization of water as a "mineral" was context-specific to other statutes and not a universal rule

On delegation, the Court reasoned that Section 17 provided "naked delegation" because it lacked a ceiling, floor, or policy guidelines for the executive to fix rates, thus violating constitutional limits on delegating essential legislative functions

However, the Court rejected the appellants' plea of Promissory Estoppel, noting that a State Government’s contractual promise cannot tie the hands of the State Legislature in enacting a statute

The Court held that the tax was essentially on the generation of electricity, which the State cannot tax

Conversely, it concurred with the then Chief Justice on the point of Promissory Estoppel, holding that the doctrine does not apply against the exercise of legislative functions

The Act was struck down.