The Uttarakhand Water Tax on Electricity Generation Act, 2012 (“2012 Act”) was enacted to levy water tax on electricity generation in the State of Uttarakhand.. Under the 2012 Act, registered users of hydropower schemes were made liable to pay water tax for water drawn for electricity generation. Section 17 authorized the State Government to fix the rate of water tax by notification and to review, increase, decrease or vary such rates from time to time.

A batch of writ petitions challenging the constitutional validity of the 2012 Act were filed and subsequently dismissed by a common judgment dated February 12, 2021, following which appeals were preferred. During the pendency of those appeals, by an interim order dated July 12, 2022, the appellants (i.e., the hydropower developers) were directed to make payment of the water tax from August 1, 2022, onwards, subject to final orders.

In particular, appellants who had already collected the water tax levied under the 2012 Act were directed to deposit the entire tax with the relevant state authorities, in terms of the demands raised. Thereafter, on October 25, 2023, the Division Bench delivered a split verdict, resulting in a reference to a third judge on the point of difference for a majority view.

The principal challenge advanced by the hydropower companies was that, in pith and substance, the levy was a tax on generation of electricity, and the State Legislature lacked legislative competence to impose such a tax. The State, on the other hand, contended that the incidence of tax was the drawal of water for use in electricity generation, and sought to justify the enactment with reference to Entries 17, 18, 45, 49 and 50 of List II and Article 288 of the Constitution.

Issue before the High Court

The central issue before the High Court was whether the impugned levy was, in substance, a tax on the drawal or use of water for electricity generation, or a tax on generation of electricity itself. This issue was critical because legislative competence to impose a tax must be traced to a specific taxing entry, and taxation is treated as a distinct field of legislation under the constitutional scheme.

The High Court also had to consider whether the 2012 Act could validly be supported under Entries 17, 18, 45, 49 or 50 of List II, or under Article 288 of the Constitution. In addition, the Court examined the challenge to Section 17 of the 2012 Act on the ground of excessive delegation, since the provision empowered the State Government to fix and vary the rates of tax by notification without any meaningful statutory guidance.

The Court therefore had to decide both the true nature of the levy and the constitutional competence of the State Legislature to enact and operationalize the impugned tax framework.

Relief given by the High Court

The High Court held that the 2012 Act on a proper analysis, imposed a tax on generation of electricity and not merely on the drawal of water. The Court reasoned that mere drawal of water did not trigger the levy; the taxable event arose only where water was drawn for generation of electricity, which made the levy inseparably linked to electricity generation.

The Court further held that the State Legislature was not competent to impose such a tax because there was no specific entry in List II authorising a State levy of this nature, and the taxing power could not be inferred from general legislative entries relating to water, land, land revenue or mineral rights. The Court also held that Article 288 was not an independent source of legislative competence for the State in the circumstances of the case.

Separately, the High Court accepted the challenge based on excessive delegation and held that Section 17 conferred an unfettered power on the executive to fix tax rates without policy guidance, thereby rendering the provision constitutionally weak.

On that basis, the High Court concluded that the 2012 Act was ultra vires the Constitution. As a result, the statutory levy imposed on hydropower generators under the 2012 Act stood struck down, giving substantive relief to the hydro power projects that had challenged the legislation.

Likely Effect on Commissioned Hydro Projects

For commissioned hydropower projects in Uttarakhand, the immediate effect of the judgment is that the State-level water tax framework under the 2012 Act cannot continue to operate, since the Act itself has been declared unconstitutional. This should relieve operational hydro projects from liability to pay water tax under that enactment, including tax assessed or sought to be recovered on the footing of water drawn for electricity generation under Sections 17 to 19 of the 2012 Act.

That said, the High Court does not, by itself, determine all consequential issues such as refund mechanics, treatment of past recoveries, or whether the State may attempt an alternative legislative or fiscal mechanism in future.

Conclusion

The High Court’s decision marks a significant development for Uttarakhand’s hydropower sector. The Court held that the impugned levy was, in substance, a tax on electricity generation, that the State lacked legislative competence to impose it, and that the rate-fixing mechanism under Section 17 also suffered from excessive delegation. For commissioned hydro projects, the decision materially strengthens the position that no water tax can be levied under the 2012 Act for water drawn for electricity generation.

This assumes particular significance given the scale of Uttarakhand’s hydropower sector. The State presently has approximately 4,269.17 MW of installed hydropower capacity. In addition, around 2,369 MW of hydro projects are under construction. These under-construction projects may also stand to benefit from the High Court’s ruling upon commissioning, since the levy would not be enforceable against them.

That said, for projects where tariff framework or PPAs permit change-in-law adjustments, regulators or procurers may seek to characterize the non-applicability of the levy as a negative change in law, i.e., a reduction in cost, with corresponding downward tariff implications.

Authors – Akshay Malhotra– Partner; and Kush Saggi– Managing Associate

Disclaimer: This publication only highlights key issues and is not intended to be comprehensive. The contents of this publication do not constitute any opinion or determination on, or certification in respect of, the application of Indian law by Talwar Thakore & Associates (“TT&A”). No part of this publication should be considered an advertisement or solicitation of TT&A’s professional services.