The Jammu and Kashmir and Ladakh High Court has struck down the imposition of water usage charges on hydropower projects under the Jammu and Kashmir Water Resources (Regulation and Management) Act, 2010, ruling that the levy effectively amounted to a tax on electricity generation.
A Division Bench comprising Justice Rajnesh Oswal and Justice Sanjay Dhar held that the State Legislature lacked the constitutional authority to impose such a tax. It declared the relevant provisions of the 2010 legislation unconstitutional to the extent that they imposed water usage charges on hydroelectric power producers.
The Court observed that the levy, despite being described as a charge for water usage, was essentially a tax on the process of generating electricity.
At the heart of the dispute was whether the government could collect money from hydropower operators for using river water to generate electricity when the levy was not linked to any specific service or benefit provided to them.
Examining Section 185-A of the 2010 Act, the Bench found that the money collected from hydropower projects was earmarked for broader government purposes. These included establishing new hydel projects, buying back existing hydroelectric projects, investing in transmission and distribution infrastructure, and purchasing electricity for the State.
The Court noted that the funds were not being used to provide any direct benefit to the project operators. Consequently, the essential element of quid pro quo, which distinguishes a regulatory fee from a tax, was absent.
The Bench concluded that the so-called water usage charges were, in substance, a tax rather than a fee for a service.
It further explained that water utilisation is inseparable from the process of generating hydroelectricity. Although water is not consumed in the conventional sense during hydropower generation, its use is indispensable to producing electricity.
Accordingly, any statutory levy imposed on water utilisation during the power-generation process effectively operates as a tax on electricity generation itself.
The constitutional question turned on Entry 53 of List II of the Seventh Schedule, which gives State Legislatures the authority to impose taxes on the consumption or sale of electricity. However, the provision does not extend to taxation of electricity generation.
The Bench held that the erstwhile State of Jammu and Kashmir had exceeded its legislative powers by introducing such a levy through the 2010 legislation.
The government had defended the charges by relying on Entry 17 of List II, which deals with water and water-related matters, including water power projects. It argued that this constitutional entry empowered the State to regulate water usage and collect charges from hydropower operators.
The government also maintained that the legal position had changed following the Jammu and Kashmir Reorganisation Act, 2019. Since Parliament had provided for the adoption of existing State laws in the newly created Union Territories, it argued that the 2010 legislation could be treated as having parliamentary backing.
The High Court rejected both submissions.
On the argument concerning the 2019 Reorganisation Act, the Bench clarified that the continuation of an existing State law in the Union Territories of Jammu and Kashmir and Ladakh did not transform it into legislation enacted by Parliament.
It further ruled that a law which was unconstitutional from the outset because the legislature lacked the necessary authority could not acquire constitutional validity simply through its subsequent adoption.
The judgment came in response to three petitions filed by independent power producers operating river-based hydroelectric projects in Jammu and Kashmir. They had challenged the statutory provisions imposing water usage charges, along with the rules framed under the legislation and the demand notices issued to recover the amounts.
Allowing the petitions, the High Court quashed the water usage levy imposed under the 2010 Act and the corresponding rules. It also set aside the demand notices issued against the petitioners.
The Bench further restrained the government from imposing any tax on electricity generation under the guise of water usage charges or through any other form of levy.
The ruling draws a clear constitutional boundary between the State’s authority to regulate water resources and its power to impose taxes on electricity. It makes clear that a charge cannot escape constitutional scrutiny merely because it is given a regulatory label when its actual character is taxation of power generation.