Apr 12, 2024

Taxing Hydropower: An Analysis of NHPC Ltd. and Ors. v. State of HP and Ors.

As India continues to make its move towards clean energy, legislative interference by state governments in the form of disguised taxation on power generation has, from time to time, threatened to hamper the progress being made in this direction. The recent judgment passed by the Himachal Pradesh High Court (‘HP HC’) in NHPC Limited and Ors. v. State of H.P. and Ors. (‘Judgment’)[1] is of relevance in this case.

The State of Himachal Pradesh (‘HP State’) had enacted the Himachal Pradesh Water Cess on Hydropower Generation Act, 2023 (‘Act’), pursuant to which a cess would be levied on the use of inter-state river water by power generation companies for the generation of hydroelectricity (‘Water Cess’). Pursuant to the Act, the Government of Himachal Pradesh (‘GOHP’) issued a Notification dated February 16, 2023, wherein, inter alia, various rates of Water Cess have been prescribed (‘Notification’).[2]

Aggrieved by the Act and the Notification, various hydro power generating companies (‘Petitioners’), filed writ petitions before the HP HC. The key grounds for such challenge and the ruling of the HP HC on the same are briefly discussed below:

i.    Constitutional Validity: The Act was challenged on the ground of the HP State’s incompetence to impose tax on generation of electricity. The Petitioners contended that while the Act levied a cess on the use of water for production of electricity, and not on any use of the river water, in essence it was a tax on production of electricity. On the other hand, GOHP contended that the levy is merely on the use of water, and since States have constitutional powers to legislate on water, the Act was within the legislative competence of the HP State.

After analysing the provisions of the Act, the HP HC determined that the taxable event in the Act was arising not from any use of water, but specifically from the use of water for generation of electricity. Hence, in pith and substance, the Water Cess was on generation of electricity and not on use of water. The Act was determined to be a taxing statute centered around taxing the generation of electricity, which is in the domain of the Parliament of India and not State Legislatures and, consequently, the Act is unconstitutional.

ii.   Excessive Delegation of Powers to the GOHP: The Petitioners had also challenged the Act on account of excessive delegation of powers to the GOHP, since the Act gave full power to the GOHP to decide the rate and manner of levying the Water Cess but did not provide for any guidelines for determining the levy. The HP HC held that while fixation of rates in a taxing statute can be left to the relevant State Government or any quasi-judicial body, the legislature must provide guidance for such fixation. In the absence of any guidance, the fixation of tax rates by the GOHP would amount to excessive delegation of powers by the legislature. The HP HC held that in the present case, the Act did excessively delegate powers to the GOHP as the Act did not provide any guidance on how the rate of Water Cess should be determined by the GOHP. Resultantly, the HP HC found the Act to be unconstitutional and beyond the scope of powers granted to the HP State under the Constitution of India.

Interestingly, apart from Himachal Pradesh, other States, such as Uttarakhand, Sikkim, and Jammu and Kashmir, have also enacted laws imposing tax on the usage of water for producing electricity, which has attracted significant criticism from stakeholders involved in the generation and consumption of hydro power. In order to discourage States from enacting statutes of similar nature, in April 2023, the Ministry of Power, Government of India, issued a letter advising State Governments to refrain from levying taxes on the generation of electricity from any source, including renewable sources.[3] However, such advice is not binding on the States, if the States take action using the powers granted to them by the Constitution of India, such as levy of taxes on sale or consumption of electricity.

As regards the HP HC’s Judgment, it will not work as a binding judicial precedent on the High Courts of other States but should have a persuasive value in respect of similar matters.

[1] NHPC Limited and Ors. v. State of H.P. and Ors. (2024 SCC OnLine HP 533; MANU/HP/0285/2024).

[2] Notification number JSV-B(A)3-1/2022, dated 16/02/2023, published by the Department of Irrigation and Public Health, Himachal Pradesh.

[3] Letter dated April 25, 2023, issued by the Ministry of Power to the Chief Secretaries of all the State Governments and Union Territories, lmposition_of_Charges_by_various_State_Governments_on_various.pdf (powermin.gov.in).




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