STATE LEGISLATURE LACKS COMPETENCE TO TAX ELECTRICITY GENERATION UNDER GENERAL WATER ENTRIES; FIXING RATES WITHOUT GUIDELINES CONSTITUTES EXCESSIVE DELEGATION.

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 production

A Division Bench of the Uttarakhand High Court delivered a split verdict on 25.10.2023: the Chief Justice upheld the Act, while the companion judge struck it down as ultra vires

The matter was referred to a third judge (Justice Alok Kumar Verma) for an opinion on whether the State Legislature possessed the competence to enact the law

The appellants contended that while the State called it a "water tax," it was effectively a tax on "electricity generation," a field not available to the State under the Seventh Schedule

1. Whether the tax imposed by the Act 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 has the competence to enact the impugned legislation 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 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 pre-existing Implementation Agreements.

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

The Court relied on the principle that "Taxation" is a distinct matter from general subjects of legislation, and power to tax cannot be derived from a general entry

The Court examined Entry 17 (Water), Entry 45 (Land Revenue), Entry 49 (Taxes on Lands), and Entry 50 (Taxes on Mineral Rights) of List II

The Court applied the rule against "Excessive Delegation," which requires the Legislature to provide policy guidelines when delegating tax-rate fixation to the Executive

Regarding "Promissory Estoppel," it applied the settled law that there can be no estoppel against the legislature in the exercise of its legislative functions

The Court analyzed the charging provisions, specifically Sections 2(c), 2(f), and 2(i), and noted that drawal of water is only taxable if it is for the "generation of electricity"

Consequently, the taxable event is not the mere use of water, but the generation process itself, placing it outside State competence

The State's attempt to link the tax to "Land" (Entry 49) or "Minerals" (Entry 50) was rejected; the Court distinguished Rekhchand Mohota and Ichchapur Industrial Coop Society, holding that water cannot be universally classified as land or mineral for taxing purposes.

Regarding delegation, the Court found Section 17 provided "naked delegation" without minimum/maximum limits or policy guidelines, rendering it invalid

On the point of Promissory Estoppel, the Court sided with the State/Chief Justice, holding that private agreements cannot interdict the Sovereign power of a Legislature to enact tax laws

The Court held that: (i) the tax is in pith and substance a tax on electricity generation, for which the State lacks competence; (ii) Section 17 is void for excessive delegation; and (iii) while the plea of Promissory Estoppel fails against legislative action, the Act remains unconstitutional for lack of legislative competence.

The reference was answered by striking down the Act