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

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

A Coordinate Bench of the High Court initially dismissed the writ petitions on February 12, 2021.

On appeal, a Division Bench delivered a split verdict on October 25, 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) to resolve the conflict.

The appellants argued that the State lacked legislative competence as the tax was effectively on "electricity generation," a field they claimed falls under Union jurisdiction.

1. Whether the State Legislature possesses the legislative competence to enact the Uttarakhand Water Tax on Electricity Generation Act, 2012, under Entries 17, 18, 45, 49, or 50 of List II or Article 288 of the Constitution?

2. 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"?

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?

4. Whether the State is barred by the doctrine of promissory estoppel from levying the tax due to prior Implementation Agreements with the power companies?

The Court applied Article 246 and the Seventh Schedule, noting that legislative entries in List I and List II are distinct fields, and power to tax cannot be derived from a general entry.

It relied on State of W.B. v. Kesoram Industries Ltd., which establishes that "taxation" is a distinct matter and cannot be inferred as an ancillary power from general entries like Entry 17 (Water).

The doctrine of "Pith and Substance" was applied to determine the true nature of the levy.

Regarding delegation, the Court applied the principle that while fixing rates can be delegated, the legislature must provide sufficient guidelines or limits to avoid "excessive delegation".

Finally, it applied the principle that there can be no "promissory estoppel" against the legislature in the exercise of its legislative functions.

The Court analyzed the "charging section" (Section 17) and the definitions under Section 2, observing that the tax is triggered only when water is drawn specifically for electricity generation.

It determined that the "taxable event" is not the mere drawal of water but the generation process itself, placing the Act, in pith and substance, as a tax on electricity generation.

The Court rejected the State's reliance on Entry 49 (Taxes on land) and Entry 50 (Mineral rights), clarifying that water is not "land" for the purposes of this tax, nor is it a "mineral" in a universal sense.

On delegation, the Court found Section 17 to be "naked delegation" because it allowed the Executive to fix and vary rates without any upper limit or legislative policy.

However, the Court sided with the State on promissory estoppel, holding that contractual promises by the Government cannot interdict the Sovereign power of the State Legislature to enact tax laws.

The Court held that the State Legislature lacks the competence to tax electricity generation and that the Act fails due to excessive delegation of legislative power. While the plea of promissory estoppel was rejected, the Act was struck down as unconstitutional. The reference was answered in favor of the appellants.