On October 25, 2023, the Ministry of Power, Government of India (“GOI”) published a circular addressing the imposition of tariffs by various State Governments on various sources of power generation. The Ministry highlights in the circular that additional charges or levies on electricity generation from various sources, such as hydropower, renewables, and thermal power, are illegal and unconstitutional.
The GOI is concerned that some state governments are imposing additional levies on power generation under the guise of development fees, taxes, or funds. These fees are frequently in the form of taxes or tariffs on electricity generation. The Ministry declares unequivocally that such charges are illegal. It earlier clarified its legal position on the implementation of water taxes or cess by specific states in a letter dated April 25, 2023. The constitutional provisions supporting this position are apparent.
Constitutional Provisions at the Core
- Schedule VII along with Entry-53 of List-II: The powers to charge taxes and duties are expressly stated in the VII Schedule. This schedule’s List-II specifies the powers of states to impose taxes or duties. State governments may not impose any tax or duty that is not expressly listed in this list. Entry 53 allows states to levy taxes on the consumption or sale of electricity inside their borders. It does not, however, include the authority to levy any tax or duty on electricity generation. This distinction is critical because electricity produced in one state can be consumed in another, and no state can impose taxes or levies on inhabitants of neighbouring states.
- Articles 286, 287 and 288 of the Constitution: Article 286 specifically prohibit states from imposing taxes or charges on the delivery of goods or services that occur outside the state. Articles 287 and 288 forbid the imposition of tariffs on the consumption or sale of electricity utilised by the Central Government or sold to it for use or by its agencies.
- Entry 56 of the Union List: This entry governs inter-state river concerns that fall under the purview of the Centre. Many hydroelectric plants are located or are planned to be built along interstate rivers. As a result, any tariff imposed on the non-consumptive usage of water from these rivers for electricity generation violates the requirements of the Indian Constitution.
- Water Cess: Hydropower projects do not use water to generate electricity. Instead, power is generated by passing water via a turbine. This is comparable to wind power, in which wind turns a turbine to generate electricity. Thus, there is no reason to levy a “water cess” on hydropower projects. Furthermore, Entry-17 of List-II prohibits states from levying any tax or duty on water. As a result, imposing a water cess is a violation of the Constitution.
A Call for Compliance
In light of these constitutional provisions, the circular from the Ministry of Power reiterates that no taxes or duties, regardless of the source of electricity generation, can be imposed by any State on the generation or inter-state supply of electricity under the guise of additional charges, fees, or funds. State governments should abolish any tax, levy, or cess collected under the name of development fees, charges, or funding on the generation of electricity from any source, whether thermal, hydro, renewables or any other.
This circular emphasises the importance of adhering to the rule of law and the Constitution in taxation concerns, as well as the GOI’s commitment to establishing a fair and legally compliant environment for the country’s energy generation and consumption. It is a call for consistency, legality, and a level playing field in the country’s energy sector.