Ministry of Power has asked states not to levy or impose tax or duty on the generation of electricity, especially from hydro projects for it is illegal, and also exhorted them to withdraw any such levies promptly. “It has come to the notice of the Government of India (Gol) that some state governments have imposed taxes/duties on the generation of electricity. This is illegal and unconstitutional,” said a power ministry communique to chief secretaries of all states and Union Territories.
The ministry said any tax/duty on the generation of electricity, which encompasses all types of generation viz. thermal, hydro, wind, solar, nuclear, etc. is illegal and unconstitutional.
In the light of constitutional provisions, the ministry stated that “no taxes or duties may be levied by any state – under any guise on the generation of electricity and if any taxes or duties have been so levied, it may be promptly withdrawn.”
The powers to levy taxes or duties are specifically stated in List II of the VII Schedule of the Constitution.
“No taxes/duties which have not been specifically mentioned in this list can be levied by state governments under any guise whatsoever – as residuary powers are with the central government,” the ministry explained.
Entry-53 of List-II (State List) authorizes states to put taxes on the consumption or sale of electricity in its jurisdiction. This does not include the power to impose any tax or duty on the generation of electricity.
This is because electricity generated within the territory of one state may be consumed in other states and no state has the power to levy taxes or duties on residents of other states, the ministry pointed out.
Some states have imposed taxes or duties on the generation of electricity under the guise of levying a cess on the use of water for generating electricity, the ministry noted.
However, though the state may call it a water cess, it is actually a tax on the generation of electricity – the tax is to be collected from the consumers of electricity who may happen to be residents in another state.
Article 286 of the Constitution explicitly prohibits states from imposing any taxes or duties on the supply of goods or services or on both where the supply takes place outside the state.
Articles 287 and 288 prohibit the imposition of taxes on the consumption or sale of electricity consumed by the central government or sold to the central government for consumption by the government or its agencies.
As per Entry-56 of the Union List of the Constitution, regulations of issues related to Inter-State Rivers come under the purview of the Centre.
Most of the hydroelectric plants in states are located/proposed to be developed on Inter-State Rivers.
Any imposition of tax on the non-consumptive use of water of these rivers for electricity generation is in violation of provisions of the Constitution, it argued.
Hydropower projects do not consume water to produce electricity. Electricity is generated by directing the flow of water through a turbine which generates electricity – on the same principle as electricity from wind projects where the wind is utilized to turn the turbine to produce electricity.
Therefore, the ministry said there is no rationale for the levy of water cess or air cess.
The levy of water cess is against the provisions of the Constitution. List II does not authorize states to levy any tax or duty on water.
