The Government of India has raised concerns over certain State Governments imposing additional charges on the generation of electricity under various pretexts, such as development fees or funds. These concerns were expounded by the Ministry of Power by a circular dated 25th October, 2023.
These additional charges, often disguised as taxes or duties on electricity generation, encompass all types of power generation, including thermal, hydro, wind, solar, nuclear, and more. The government asserts that such charges are illegal and unconstitutional.
In a letter dated April 25, 2023, the Ministry of Power (MoP) clarified the legal position regarding the imposition of water taxes or cess by certain states. The letter reaffirmed the constitutional provisions governing this matter:
- The powers to levy taxes and duties are explicitly mentioned in the VII Schedule of the Indian Constitution. List III of the VII Schedule outlines the powers of states to levy taxes or duties in entries 45 to 63. Any taxes or duties not specified in this list cannot be imposed by state governments under any circumstances, as the residuary powers belong to the Central Government.
- Entry 53 of List II (State List) authorizes states to levy taxes on the consumption or sale of electricity within their jurisdiction. However, this does not include the power to impose any taxes or duties on the actual generation of electricity. This is because electricity generated in one state might be consumed in other states, and no single state has the authority to levy taxes or duties on residents of other states.
- Article 286 of the Constitution explicitly prohibits states from imposing any taxes or duties on the supply of goods or services, including electricity, where the supply takes place outside the state.
- Articles 287 and 288 further prohibit the imposition of taxes on the consumption or sale of electricity when consumed by the Central Government or sold to the Central Government for its agencies.
Given the constitutional provisions highlighted above, the government emphasizes that no state has the authority to impose taxes or duties on the generation or inter-state supply of electricity under the guise of additional charges or fees, regardless of the energy source—be it thermal, hydro, renewables, or any other.
In light of these constitutional principles, all states are strongly advised to promptly withdraw any form of tax, duty, or cess that has been levied under the pretext of development fees, charges, or funds on the generation of electricity from any source, whether it be thermal, hydro, renewables, or any other energy source.
