In a recent missive dated October 25, 2023, the Ministry of Power has sternly cautioned state governments against the imposition of additional charges on the production of electricity from various sources, ostensibly under the auspices of development fees or funds. Earlier, in April, the Ministry had vehemently urged states to desist from levying any form of taxation or duties on electricity generation, particularly from hydroelectric projects.
The central government, in no uncertain terms, has underscored that states possess no authority to levy taxes or duties on electricity generated from any source, be it coal, hydro, wind, solar, or nuclear. Such actions have been categorically branded as illegal and unconstitutional.
The Ministry of Power, in its communication, has elucidated the constitutional standpoint on this matter. The powers to impose taxes and duties are explicitly delineated in the VII Schedule. List-II of the VII Schedule enumerates the states’ prerogatives to impose taxes and duties under entries 45 to 63. Notably, taxes and duties not explicitly mentioned in this list cannot be imposed by state governments under any pretense, as the residual powers rest with the central government.
Furthermore, Entry-53 of List-II (State List) empowers states to levy taxes on the consumption or sale of electricity within their jurisdiction. However, this provision does not extend to the imposition of taxes or duties on electricity generation. This is because electricity generated within one state’s borders might be consumed in other states, and no state possesses the authority to impose taxes or duties on residents of other states.
Article 286 of the Constitution explicitly prohibits states from imposing taxes or duties on the supply of goods or services when the supply occurs outside the state. Articles 287 and 288 also prohibit the imposition of taxes on the consumption or sale of electricity consumed by the Central government or sold to the Central government for its consumption or by its agencies.
In light of these constitutional provisions, no state is allowed to levy taxes or duties on the generation or inter-state supply of electricity, masquerading as additional charges or fees on electricity generation from any source, whether it’s thermal, hydro, or renewables.
The Central government has issued a resounding call to states to promptly abolish any form of tax, duty, or cess imposed under the guise of development fees or charges on electricity generation from any source. In April, the Ministry had previously urged states to refrain from imposing taxes or duties on electricity generation, particularly from hydro projects. Some states have imposed taxes and duties on electricity generation, ostensibly under the guise of a water cess for generating electricity.
However, the central government asserts that even if a state labels it as a water cess, it essentially constitutes a tax on electricity generation, which is to be collected from electricity consumers, some of whom may reside in other states. The Ministry of Power emphatically argues that the imposition of taxes on the non-consumptive use of water from rivers for electricity generation contravenes constitutional provisions. It emphasized that most hydroelectric plants in states are located along inter-state rivers and do not consume water for electricity production.
Electricity generation in these plants occurs by directing the flow of water through a turbine, a process akin to wind projects where wind powers turbines to generate electricity.
In conclusion, the Central Government is leaving no room for ambiguity: states must cease any form of taxation or duties on electricity generation, and the constitutional framework unequivocally supports this stance. This directive aims to ensure fair and consistent practices across the nation’s power generation landscape.
