States levying Water and Air Cess on Electricity Generation Illegal
States’ taxation remit limited to consumption and sale of electricity within their territory
April 28, 2023
The Ministry of Power has asked all state governments and union territories to withdraw any tax or duty on electricity generation, especially from hydropower projects, after some cases came to light.
The ministry clarified that such taxes are unconstitutional and illegal, as per the provisions of the Constitution of India.
The ministry noted some states have imposed a water cess for hydropower projects and an air cess for wind power projects.
According to the Constitution, states have the power to tax the consumption or sale of electricity within their territory, but not the electricity generation. This is because electricity generated in one state can be supplied to another, and no state can impose taxes on residents of other states.
The Constitution also prohibits states from levying taxes or duties on goods or services supplied outside the state. It further bars states from imposing taxes on electricity sold to or consumed by the Central Government or its agencies. Therefore, any tax or duty on electricity generation would violate these constitutional principles.
The Ministry also pointed out that regulating issues related to inter-state rivers is the responsibility of the Centre. Most of the hydroelectric projects are located on inter-state rivers. Hence, any tax on the non-consumptive use of water for electricity generation is against the Constitution.
Hydropower projects do not consume water to produce electricity, using the kinetic energy of water flowing through a turbine. Similarly, wind projects use the wind’s kinetic energy to turn the turbine. As a result, there is no justification for levying a ‘water cess’ or ‘air cess’ on these renewable energy sources.
The Ministry urged the states and union territories to comply with the notification and refrain from imposing any tax or duty on electricity generation. The Ministry said this would promote renewable energy development and ensure affordable and reliable power supply.
The Ministry waived the inter-state transmission system charges on evacuating electricity from new hydropower projects in the country, providing the same concession already available to solar and wind power. This will be available to hydropower projects for which construction work is awarded, and power purchase agreements will be signed by June 30, 2025.
The Ministry unveiled the renewable purchase obligation targets for wind and hydropower projects from FY 2022-30. The objective is to enhance the proportion of renewable energy in the nation’s energy mix and foster diversity by encouraging the adoption of wind and hydropower projects in addition to solar power.