The Power Ministry has said that state taxes or duties on electricity generation is unconstitutional, after some states levied a cess on water use for hydropower generation.

“It has come to the notice of the government of lndia (Gol) that some state governments have imposed taxes/ duties on generation of electricity. This is illegal and unconstitutional. Any tax/ duty on generation of electricity, which encompasses all types of generation, namely thermal, hydro, wind, solar, nuclear, etc, is illegal and unconstitutional,” the Ministry said in a communication to state chief secretaries.

While some states have imposed taxes/ duties on electricity generation under the guise of a cess on water use, it is actually a tax on electricity generation, it said, adding that the tax would be collected from electricity consumers who may be residents of another state.

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Scope for levying taxes

The Union Ministry explained to states that powers to levy taxes/ duties are specifically stated in the Vll Schedule. No taxes/ duties that are not specifically mentioned in this list can be levied by the state governments under any guise whatsoever, as the residuary powers are with the central government.

“Entry-53 of List-ll (State List) authorises the states to put taxes on 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/ duties on residents of other states,” it added.

Article 286 of the Constitution explicitly prohibits states from imposing any taxes/ duties on supply of goods or services or both where the supply takes place outside the state. Besides, Articles 287 and 288 prohibit taxes on consumption or sale of electricity that is consumed by the central government or sold to the central government for consumption by the government or its agencies, the ministry said.

Cess on hydropower

“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 wind is utilised to turn the turbine to produce electricity. Therefore, there is no rationale for levy of water cess or air cess,” it added.

The Union Ministry pointed out that levy of water cess is against Constitution Entry-l7 of List-ll, which does not authorise states to levy any tax or duty on water.

“As per Entry 56 of the Union List of the Constitution of lndia, 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/ 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 lndia,” the Ministry added.