Water Tax On Electricity Generation In A Hydropower Project: Uttarakhand High Court Holds Levy Unconstitutional

The Water Tax Act was enacted by the State Legislature to levy a water tax on persons drawing water from any source within the State for the generation of electricity. Subsequently, State Government prescribed rates of water tax by notifications.

Various companies engaged in hydro power generation challenged the constitutional validity of the Water Tax Act on the grounds that (i) the State Legislature lacked the legislative competence to enact the Water Tax Act, which in pith and substance imposed a tax on the generation of electricity using hydropower; (ii) Section 17 of the Water Tax Act constituted an excessive delegation of the power to fix tax rates to the State Government, without any limits or guidelines; and (iii) the State Government was bound by its contracts with the power generation companies and could not resile from these agreements by enacting the Water Tax Act.

The High Court passed a common judgment and order in a group of matters and struck down the Water Tax Act as unconstitutional. The High Court dealt with the following issues:

Findings And Ratio

The Water Tax Act is a tax on generation of electricity and not on drawal of water

Applying the doctrine of pith and substance, the High Court held that the Water Tax Act, despite its nomenclature, imposes a tax on the generation of electricity. It noted that under Section 2(f), a “User” is liable to pay tax only if water is drawn for the generation of electricity. The mere drawing of water without such purpose attracts no liability whatsoever. Further, definitions of “Electricity” under Section 2(c), “Water Tax” under Section 2(i), and the charging mechanism under Sections 12, 17, 18 and 19, all confirmed that the “tax” is triggered by, and inextricably linked to, the act of generating electricity.

The State Legislature lacks legislative competence

The State of Uttarakhand sought to trace the legislative competence for the Water Tax Act to its powers to regulate water and levy tax on land and buildings and mineral rights under the Seventh Schedule of the Constitution (see Entries 17, 18, 45, 49 and 50 of List II of the Seventh Schedule). However, the High Court rejected these grounds holding, inter alia, as under:

(a) Entry 17 (Water) is a regulatory entry, not a taxing entry. It is well-settled that the power to tax cannot be deduced from a general legislative entry as an ancillary power.

(b) Entry 49 (Taxes on Lands and Buildings) requires the tax to be directly imposed on land and buildings as units, with a definite nexus to land. The impugned levy is a personal, event-based charge on a “User” and satisfies neither condition.

(c) As regards Entry 50 (Taxes on Mineral Rights), the State argued that water is a mineral relying on Ichchapur Industrial Cooperative Society Ltd. vs. ONGC, (1997) 2 SCC 42 which argument was rejected observing that the Supreme Court interpreted “mineral” in the narrow context of a specific statute and the Supreme Court did not make a universal declaration on the issue.

(d) With respect to Article 288, the High Court held that it is not a source of legislative competence, rather it is enabling clause operative in a specific and limited context, and subject to many conditions. The conditions of Article 288(2) were also not fulfilled in relation to the Water Tax Act.

The High Court reiterated that taxation is a distinct matter and that the general subjects of legislation and taxation are dealt with under separate groups of entries in the Seventh Schedule. Accordingly, the High Court held that there is no entry in List II that empowers State Legislature to levy a tax on the generation of electricity.

Section 17 of the Water Tax Act constitutes excessive delegation

Section 17 of the Water Tax Act conferred on the State Government an unfettered power to fix, review, increase, decrease or vary the rate of water tax “in the manner it deems fit”, without any legislative policy, guidelines, minimum, or maximum limits. The High Court reiterated that while the legislature may delegate the power to fix tax rates to a non-legislative authority, it must provide adequate guidance for such fixation. The absence of any such guidance in the Water Tax Act therefore rendered Section 17 constitutionally invalid.

No promissory estoppel against the legislature

The power generation companies contended that the State was bound by express contractual undertakings in their respective Implementation Agreements and Power Purchase Agreements under which the State had agreed not to impose any taxes, duties, levies, or charges on electricity generated during the agreement term. The High Court reiterated that there is no promissory estoppel against the legislature in the exercise of its legislative functions and the agreements were entered into with the State Government and not with the State Legislature.

Outcome And Directions

The High Court struck down the Water Tax Act holding, inter alia, that: (i) the Water Tax Act, in pith and substance, imposes a tax on the generation of electricity and not on the drawal of water, and the State Legislature lacks the legislative competence to enact such a law; and (ii) Section 17 of the Water Tax Act constitutes an excessive delegation of the power to fix tax rates to the State Government, without any legislative policy, guidelines or limits.

The issue of the State's power to levy tax on generation of electricity in a hydropower project is relevant inasmuch as the levy of water tax under the Act is identified as a “change in law” event in the power purchase agreements or other agreements between a State Government and a power generation company as per the interpretation by Uttar Pradesh Electricity Regulatory Commission.

The High Court of Himachal Pradesh examined the constitutional validity of a similar Act in Himachal Pradesh (the Himachal Pradesh Water Cess on Hydropower Generation Act, 2023) in NHPC Ltd v State of Himachal Pradesh, 2024: HHC: 999 and appeals are pending before the Supreme Court from the High Court judgment (see Civil Appeal nos. 11148-11152 of 2025, State of Himachal Pradesh & Ors v NHPC Ltd & Ors). It is likely that the judgment of the Uttarakhand High Court will also be challenged before the Supreme Court and it remains to be seen whether the views expressed by the High Courts of Himachal Pradesh and Uttarakhand on the power of the State Government to levy tax on generation of electricity in a hydropower project are upheld by the Supreme Court.

The article has been authored by Divya Chaturvedi, Partner, Saransh Shaw, Counsel and Chandan Kumar, Associate at Khaitan & Co. Views expressed are personal.

Divya Chaturvedi

Saransh Shaw

Chandan Kumar