Power Ministry Says Imposing Tax / Cess On Power Generation By States’ Illegal’, Asks To Withdraw Such Orders

The Ministry of Power, in its latest order, has termed the collection of taxes and cess by states on power generation as ‘illegal and unconstitutional.’ In a letter to all the Chief Secretaries, the government order asked states to take steps to withdraw any such order. 

The ministry has said that it was informed that some states had levied taxes and cess on power generation. “This is illegal and unconstitutional. Any tax/duty on electricity generation which encompasses all types of generation viz thermal, hydro, wind, solar, nuclear etc is illegal and unconstitutional,” the order said. 

“The powers to levy taxes/duties are specifically stated in the Vll Schedule. List -ll of the Vll Schedule lists the powers of levying of taxes/duties by the States in entries-4s to 63. No taxes/duties which have not been specifically mentioned in this list can be levied by the State Governments under any guise whatsoever – as Residuary powers are with the Central Government,” the order said.

The order comes after some of the states like Himachal Pradesh and Uttarakhand levied water cess on hydro projects, leading to a spar with some of the neighbouring states, which anticipated rise in power rates due to the increased cost of power generation.

However, the latest order has clarified that the states cannot levy taxes in the name of water cess for hydropower projects. “Some States have imposed taxes/duties on 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,” the order said.

The ministry’s order said that Article 286 of the Constitution explicitly prohibits states from imposing any tax or duties on the supply of goods and services or on both where the supply occurs outside the State. 

“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 Hydro-Electric Plants in the 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 of India,” the order said. 

The order also clarified that as hydropower projects do not consume water to produce electricity and it is produced with turbines, thus there was no rationale for imposing any water tax on air tax for such projects. The ministry has directed the State to withdraw any such order if existing in any state.

“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,” the order concluded.