New Delhi: The Ministry of Power has asked states to “promptly withdraw” water cess on hydro projects, a letter written by the ministry to Chief Secretaries of states reviewed by PSU Watch shows. “The levy of water cess is against the provisions of the Constitution. Entry-l7 of List-II, does not authorise the State to levy any tax or duty on water,” said the Ministry of Power in a letter dated April 25. It added, “… no taxes duties may be levied by any State under any guise on generation of electricity and if any taxes/duties have been so levied, it may be promptly withdrawn.”
‘States not authorised to impose taxes on electricity generation’
Noting that Entry-53 of List-ll (State List) of the Constitution authorises state governments to put taxes on the consumption or sale of electricity in its jurisdiction, the Power Ministry said, “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.”
“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 (an)other State,” the ministry said.
The Central government has also told states that there is no rationale for the levy of ‘water cess’ because hydro power projects do not consume water to produce electricity, much like wind power projects. “Hydro Power 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,’” said the Power Ministry.
“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 the provisions of the Constitution of India,” it added.
"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," said the Ministry of Power.
The Centre’s letter to state governments comes as the Himachal Pradesh High Court is hearing a water cess case — Nanti Hydro Power vs State. The Himachal Pradesh Assembly had passed the Himachal Pradesh Water Cess on Hydropower Generation Bill, 2023, on March 16. Along with the existing 172 power projects in the state, it will be implemented on future projects as well.
In the case that the Himachal Pradesh HC is hearing, the petitioner, Nanti Hydro Power has told the court that it will suffer irreparable loss if the Water Cess bill passed by the state Assembly is not stayed. The petitioner has also said that the payment of water cess will make the hydro power project unviable and will lead to the imposition of such financial burden that the company will not be able to sustain and it may also lead to the closure of the project. Therefore, the petitioner has urged the court to stay the implementation of the bill.
After a hearing on April 26, the High Court has issued notices to both the Centre and Himachal Pradesh state government and has listed the case for the next hearing on May 30.
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