Ministry of Power Declares Water and Air Cess on Electricity Generation Illegal

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The Ministry of Power has issued a notification to all state governments and union territories to withdraw any taxes or duties on electricity generation, particularly from hydropower projects. The ministry stated that such taxes are unconstitutional and illegal as per the provisions of the Indian Constitution.

Some states have imposed a water cess for hydropower projects and an air cess for wind power projects, which violate constitutional principles. 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 Constitution allows states to tax the consumption or sale of electricity within their territory, but not the electricity generation because electricity generated in one state can be supplied to another, and no state can impose taxes on residents of other states.

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The Ministry also pointed out that most of the hydroelectric projects are located on inter-state rivers, and regulating issues related to inter-state rivers is the responsibility of the Centre. Therefore, any tax on the non-consumptive use of water for electricity generation is against the Constitution. The Ministry urged states and union territories to comply with the notification and refrain from imposing any tax or duty on electricity generation to promote renewable energy development and ensure affordable and reliable power supply.

Additionally, the Ministry waived the inter-state transmission system charges on evacuating electricity from new hydropower projects, providing the same concession already available to solar and wind power. Renewable purchase obligation targets have also been set for wind and hydropower projects from FY 2022-30 to enhance the proportion of renewable energy in India’s energy mix and foster diversity by encouraging the adoption of wind and hydropower projects alongside solar power.

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