Imposing tax on electricity generation illegal: Power Ministry warns states 

In a terse warning to all states and Union Territories, the Ministry of Power has asked not to levy or impose any tax or duty on generation of electricity especially from hydro projects. In a communique to all States’ chief secretaries on Wednesday, the ministry also raised the issue of imposition of a water cess, noting that there were no provisions in the Constitution.

The communique said, "It has come to notice that some State Governments have imposed taxes or duties on generation of electricity. This is illegal and unconstitutional. Any tax/duty on generation of electricity, which encompasses all types of generation viz. thermal, hydro, wind, solar, nuclear etc is illegal and unconstitutional."

"Some States have imposed taxes/duties on 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 other state," the Ministry noted.

"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," the communique added.

States are empowered by the Constitution to levy taxes on consumption or sale of electricity in their jurisdiction, but this does not include the power to impose any tax or duty on the generation of electricity. However, though the state may call it a water cess, it is actually a tax on generation of electricity - the tax is to be collected from the consumers of electricity who may happen to be residents in other state.

Most of the hydro-electric plants in 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 provisions of the Constitution, the ministry argued.

Entry-53 of List-II (State List) authorizes states to put taxes on consumption or sale of electricity in its jurisdiction. This does not include the power to impose any tax or duty on the generation of electricity.

Article 286 of the Constitution explicitly prohibits states from imposing any taxes or duties on supply of goods or services or on both where the supply takes place outside the state.

Articles 287 and 288 prohibit the imposition of taxes on consumption or sale of electricity consumed by the central government or sold to the central government for consumption by the government or its agencies.

As per Entry-56 of the Union List of the Constitution, regulations of issues related to Inter-State Rivers come under the purview of the Centre.

Therefore, the ministry said there is no rationale for levy of water cess or air cess.