The State Legislature lacks competence to tax electricity generation as taxing power cannot be derived from general legislative entries.

The State of Uttarakhand enacted "The Uttarakhand Water Tax on Electricity Generation Act, 2012," imposing a tax on "users" (hydroelectric power developers) for water drawn from sources within the state for electricity generation

Multiple power companies challenged the Act’s constitutional validity, arguing the State lacked legislative competence to tax electricity generation and that the tax violated agreements (Implementation Agreements/Power Purchase Agreements) which promised tax exemptions

A Division Bench of the High Court delivered a split verdict on 25.10.2023: one judge upheld the Act, while the other struck it down as ultra vires. Consequently, the matter was referred to a third judge (Alok Kumar Verma, J.) for a majority opinion

1. Whether the subject matter of the Act—taxing the drawal of water for electricity generation—pithily and substantially constitutes a tax on the generation of electricity, thereby exceeding the State's legislative competence under the Seventh Schedule

2. Whether Section 17 of the Act suffers from the vice of excessive delegation by granting the State Government unfettered power to fix tax rates without legislative guidelines

3. Whether the State is barred by the doctrine of promissory estoppel from levying the tax due to prior contractual commitments/exemptions granted to the appellants

The Court applied the Doctrine of Pith and Substance to determine the true nature of the legislation regardless of its nomenclature

It relied on Article 246 read with the Seventh Schedule, noting that while Entry 17 of List II covers "water," taxation is a distinct matter that cannot be inferred from general entries (State of W.B. v. Kesoram Industries Ltd.)

The Court recognized that Article 288 is an enabling provision/exemption clause rather than an independent source of taxing power

Regarding delegation, the Court applied the principle that fixing tax rates without a maximum limit or legislative policy constitutes "excessive delegation"

The Court upheld 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 Act’s charging provisions (Sections 2, 12, and 17) and concluded that the taxable event is not merely the drawal of water, but specifically the drawal for electricity generation. Since the liability only arises upon generation, the tax is effectively on "electricity generation," a field not available to State Legislatures under List II

The Court rejected the State's attempt to trace power to Entries 45, 49, or 50 (land/minerals), clarifying that water usage for power is not a "tax on land" as defined in H.S. Dhillon

The Court found Section 17 unconstitutional because it delegated the "essential legislative function" of rate-fixing to the executive without any ceiling, floor, or guiding policy

The Court sided against the appellants on promissory estoppel, reasoning that executive agreements cannot bind the State Legislature's sovereign power to enact laws

It held that the State lacks legislative competence to tax electricity generation and that Section 17 constitutes "excessive delegation"

The final conclusion remains that the Act is struck down as unconstitutional