Tax levied by states and union territories on electricity generation illegal: Centre

In March, Himachal Pradesh, which has a number of hydropower projects, said it will be levying a 10 paisa per cubic metre cess on projects which was opposed by the governments of neighbouring Haryana and Punjab.

In a stern letter to all states and union territories (UTs), the central government has made it clear that any tax or duty levied by them on the generation of electricity is “illegal” and “unconstitutional”. Stating that some state governments are imposing a “water cess” on hydroelectric projects, the Centre directed all states and UTs to immediately withdraw any such tax or duty.

“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. 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,” read the letter issued by the Ministry of Power to the chief secretaries of all states and UTs on April 25.

“ln light of the above constitutional provisions, no taxes/duties may be levied by any state under any guise on the generation of electricity and if any taxes/duties have been so levied, it may be promptly withdrawn,” it stated.

On March 16, the Himachal Pradesh assembly passed the Himachal Pradesh Water Cess on Hydropower Generation Bill, 2023. The Congress-led government in the hilly state, which has a number of hydropower projects, stated it will be levying a 10 paisa per cubic metre cess on projects with heads up to 30 metres, 25 paise on 30-60 metres, 35 paise on 60-90 metres, and 50 paise per cubic metre over 90 metres. This was opposed by the governments of neighbouring Haryana and Punjab.

The power ministry in eight points cited the Constitutional provisions to explain that states and UTs have no power to levy such cess, tax or duty on electricity generation. It said that Article-286 of the Constitution explicitly prohibits states from imposing any taxes/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, it stated.

“Some states have imposed taxes/duties on the generation of electricity under the guise of levying a cess on the use of water for generating electricity. 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 other states,” read the letter.

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The Centre also explained that as per entry-56 of the Union List of the Constitution of India, regulations of issues related to inter-state rivers come under the purview of the Centre. Most of the hydroelectric plants in the states are located or 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
of India,” it said.

The Centre even explained the basics of hydropower in its letter to put forward its point. It said, “Hydropower projects do not consume water to produce electricity. Electricity is generated by directing the flow of water through a turbine - on the same principle as electricity from wind projects where wind is utilised to turn the turbine to produce electricity. Therefore, there is no rationale for levy of ‘water cess’ or ‘air cess’.”

In an interview with Moneycontrol on April 13, Union Minister for Power and Renewable Energy RK Singh said the country currently has about 46,000 MW of hydropower projects installed. “Another 14,000 MW is under construction. Besides, we will be starting construction for another 16,000 MW of hydropower projects soon,” he said.

Singh also said that the Centre is planning to merge multiple hydro PSUs into one. He also extensively talked about the measures taken to reduce delays in the completion of hydropower projects.