Tax levies on electricity generation: Centre tells States to scrap levies on power generation

Source: The post is based on the article “Centre tells States to scrap levies on power generation” published in The Hindu on 27th April 2023

What is the News?

The Central Government has issued a terse warning to States against resorting to tax levies on electricity generation, including through the imposition of a water cess.

What is the issue?

Some States have imposed taxes/duties 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 centre has called this illegal and unconstitutional 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.

What are the grounds based on which the Centre has called the tax levies on electricity generation by States as unconstitutional?

Entry-53 of List-II (State List) authorizes states to put taxes on the 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 the 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 the 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.

– Most of the hydroelectric 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.