State Legislature lacks competence to tax electricity generation by masking it as a water drawal tax.

The State of Uttarakhand enacted "The Uttarakhand Water Tax on Electricity Generation Act, 2012," imposing a tax on "users" (hydroelectric power producers) for drawing water to generate electricity

Various power corporations challenged the Act's constitutional validity, arguing the State lacked legislative competence as the tax was effectively on electricity generation, which falls under the Union's domain

A Division Bench of the Uttarakhand High Court delivered a split verdict on 25.10.2023: the Chief Justice upheld the Act, while Justice 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 subject tax is in pith and substance a tax on the "drawal of water" or a tax on the "generation of electricity"

2. Whether the State Legislature possesses the 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 suffers from the vice of excessive delegation by granting the State unfettered power to fix tax rates without guidelines

4. Whether the State is barred by the doctrine of promissory estoppel from levying the tax due to prior implementation agreements promising tax exemptions

The Court applied the Doctrine of Pith and Substance to determine the true nature of the levy

It relied on Article 246 and the Seventh Schedule, noting the distinction between general legislative entries and taxing entries as established in State of West Bengal v. Kesoram Industries Ltd., which held that taxing power cannot be derived from a general entry

The Court referenced Article 265, requiring tax to be levied only by authority of law

The principle from Union of India v. H.S. Dhillon regarding Entry 49 List II requiring taxes to be on land/buildings as units

The doctrine of "Excessive Delegation" was applied, asserting that while rate-fixing can be delegated, the legislature must provide a policy framework or limits

Applying the principle that there is no "Promissory Estoppel against the Legislature" in the exercise of its legislative functions

Justice Verma analyzed the charging provisions (Sections 2, 12, and 17) and concluded that since the tax is triggered only when water is used for electricity generation, the taxable event is the generation itself, not mere water drawal

The Court rejected the State’s reliance on Entry 17 (Water) because it is a general entry and cannot support a tax law

It also rejected Entry 49 (Land) and Entry 50 (Minerals), noting that water used for power is not "land as a unit" nor was it defined as a "mineral" for universal taxing purposes in the cited precedents

Regarding Article 288, the Court held it is an exemption/enabling provision and not an independent source of legislative power

On delegation, the Court found Section 17 provided "naked delegation" to the Executive to fix rates without any statutory ceiling or guidance, rendering it unconstitutional

The Court sided with the State on promissory estoppel, reasoning that a government contract cannot bind the sovereign legislative power of the State

The Court held that the tax is in pith and substance a tax on electricity generation, which the State is incompetent to levy, and that Section 17 constitutes an impermissible excessive delegation of legislative power

While the plea of promissory estoppel was rejected, the Act was struck down for lack of legislative competence. The reference was answered in favor of the appellants/petitioners