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Synopsis

The enactment of the Himachal Pradesh Water Cess on Hydro Power Generation Bill, 2023 which imposes a cess on the water used for electricity generation presents a unique legal issue on the powers of taxation that is yet to be settled. The Himachal Pradesh (HP) High Court is due to hear the challenges to the Act, having already issued notices to the Centre and State on the matter, and listed to hear the matter at the end of this month. The petitioner, a private hydroelectric power operator, contends that the cess is illegal and unconstitutional as it violates Article 288 of the Constitution.

The challenge will also involve the legislative competence of the HP Legislature to enact the cess and the interaction with Inter-State Water Disputes Act. Considering the Central Government has already issued a communique opposing the cess, the Centre will maintain the same stand in the High Court. The Himachal High Court will be not without precedent, as the Uttarakhand High Court decided a challenge to an identical water cess in Alaknanda Hydro Power v. State of Uttarakhand (2021). An analysis of the same will indicate the arguments the Himachal High Court will have to consider.

Explaining the Uttarakhand Judgment

In Alaknanda, the Uttarakhand High Court heard challenges to the  Uttarakhand Water Tax on Electricity Generation Act, 2012. This same legislation has been copied verbatim by HP. Considering this, the issues in front of the Himachal High Court are exactly similar to the issues that a single bench of the Uttarakhand High Court considered.

In Alaknanda, the following broad questions were sought to be decided by the bench:

1. Whether the water cess is an indirect charge on the generation of electricity and therefore violates Article 288 of the Constitution, which mandates the assent of the President for any legislation that imposes a tax on water or electricity stored/generated in or from an inter-state river.
2. Whether the state is competent to enact the legislation as there is no specific entry relating to the taxation of water for states. Further, whether the state’s contention that usage of water can be regulated as a ‘mineral’ can be accepted.
3. Whether the Inter-State Water Disputes Act, 1956 under section 7 requires states to not impose any additional levy for the use of water on an inter-state river and whether the Act flows from both Article 262 and Entry 56 of the Union List.
4. Whether the water cess violates the Restated Implementation Agreement (RIA) that was made between the state and the company. Specifically, whether the Water Usage Rights in the RIA that limits taxation by the state and provides 12% of power as mandated by the National Hydro Power Policy have been violated.

In all the issues, the Uttarakhand High Court found for the Uttarakhand Government. The court held that:

1. State governments are empowered to impose such a cess as the Seventh Schedule empowers the state to regulate water, land, land revenue, taxes on land & buildings, and taxes on minerals (entries 17, 18, 45, 49, and 50 of the State in the Seventh Schedule) giving wide construction to the word “land” and “mineral”.
2. The Inter-State Water Disputes Act, 1956 does not regulate the usage of inter-state rivers as under Entry 56 in the Union List but under Article 262 which specifically relates to inter-state river disputes. This is based on the decision of the constitutional bench of the Supreme Court in In the Matter of Cauvery Water Disputes Tribunal (1991) that the Inter-State River Water Disputes Act, 1956 was enacted on the narrow provisions of Article 262 (Refer ❡42).
3. The cess is not affected by Article 288 of the Constitution as it relates to the storage of electricity and water for consumptive use of inter-state river waters.Thus, the legislation did not require Presidential Assent to come into force.
4. The cess is imposed on all projects and not merely the ones of the Central Government. Therefore, the RIA’s terms are not violated as even Public Sector Units under the State Government have to pay the cess.

Analysing the Contentions

Many of the contentions accepted by the Uttarakhand High Court do deserve closer scrutiny. The cess can set forth regressive policy outcomes, and the Uttarakhand High Court seems to have failed in exploring all contentions in the matter. (In other words, the decision is arguably per incuriam).

Firstly, Article 288 sets a clear restriction on the ability of states to levy a tax on electricity generated or water stored from or in an inter-state river. The contention of the state was that the cess is on the water used for electricity generation and not directly on water or electricity “stored, generated, consumed, distributed or sold”. This however ignores the issue of colourable legislation, which prohibits the legislature from enacting indirectly what cannot be done directly. While the Court considered this aspect, it was rejected. While it is true that the tax is not on electricity generated from hydroelectric projects, the water cess operates as an indirect tax on the generation of electricity itself.

The constitutional history of Article 288 also makes it clear that the provision for Presidential Assent was specifically added to prevent inter-state disputes on taxation. It was as a result of provincial opposition to the original provisions in the draft constitution that Article 288 was added to the Constitution. Article 288 (then Article 265-A) was introduced as a part of a broader reconsideration of the taxation powers of provinces and the Union. Dr. B.R. Ambedkar and N.V. Gadgil (the then-Power Minister) argued that this Article was necessary to ensure the viability of inter-state projects such as the Damodar Valley Corporation that might face multiple taxation.[1] Initially, this was a broad limitation to the state’s taxation power, but this was altered due to provincial opposition to enable such taxation to be imposed with Presidential Assent.[2] Considering this background, it is quite clear that the Article was meant to prevent the sort of disputes that have erupted between Himachal Pradesh, Punjab, and Haryana over the HP legislation.

While the High Court mentions the Judgment of the Supreme Court in State of West Bengal v. Kesoram Industries Ltd. ((2004) 10 SCC 201), it fails to consider the salient points in the same. The Judgment was clear while construing a broad meaning of land, it was in reference to that which is under or over land. While construing a broad interpretation, the Judgment was clear in its understanding that “land” refers to a broad understanding and should not be construed so widely as to include water. Water is clearly different from land, with it also being provided a separate entry - entry 17 of List II in the Seventh Schedule.

The question of violations of Agreements between Hydroelectric project operators and participant states can also not be ignored. Most agreements with private hydroelectric projects would have barriers and limitations on taxation, with most projects providing free electricity in turn.

Conclusion

While there is no doubt that states have wide taxing power, it has to operate within the framework of the Constitution. The Himachal Legislation falls foul of the Constitutional restriction on taxing inter-state river projects. A cess that is applicable to the usage of water for the generation of electricity belies the understanding of taxation which is on the creation, generation, or consumption of some good or service. Taxing the water used for electricity generation, it is in fact a tax on the generation of electricity itself.

The Himachal Pradesh High Court in considering these matters will have to consider cardinal issues relating to Article 288 and its applicability, as well as the taxing power of the state under various entries. The flouting of the National Hydro Power policy may also be a consideration for the court. The impacts on the incentives in the sector, as well as the political impact of such water cess, is another matter altogether.

The matter may ultimately have to be decided by the Supreme Court, considering an appeal to Alaknanda is also pending in the Uttarakhand High Court. The decision will impact the multitude of hydroelectric projects across the country, as well as inter-state and centre-state relationships.