Hydropower Water Tax & Legislative Competence: CLAT LR

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A hydropower plant does not drink the river. Water enters a pipe high up the slope, falls, spins a turbine and flows back into the same river a little further down. So when a government sends the plant a bill for "using water", what exactly is it charging for?

On Thursday, 29 October 2026, the High Court of Jammu & Kashmir and Ladakh gave its answer. It struck down water usage charges that the erstwhile State of J&K had levied on hydropower projects since 2010, holding that they were really a tax on generating electricity, a tax the State legislature never had the power to impose. Demand notices sent to the power companies were quashed.

For a CLAT aspirant this is a near-perfect Legal Reasoning story, built on one question: does this legislature have the power to make this law? And it lands in the week of the 42nd Amendment's 50th anniversary, a reminder that the map of who makes which law can itself be redrawn.

🎯 In a nutshell

The ruling: the J&K and Ladakh High Court held that water usage charges on hydropower plants were, in substance, a tax on generation of electricity, beyond the competence of the State legislature that passed the law in 2010.
The principle: India's Constitution splits law-making between Parliament and the states through three Lists. A legislature that strays outside its List acts ultra vires, beyond its powers, and the law is void to that extent.
Label versus substance: calling a levy a "charge" or "fee" does not decide what it is. Courts look at what it actually does. A fee pays for a service to the payer; a tax raises money for general purposes.
Regulate is not tax: states can regulate water, but the power to tax must come from a separate taxing entry. The court found none for water, and the states' electricity taxing power covers only consumption or sale, not generation.
The bigger picture: Himachal Pradesh and Uttarakhand lost similar fights in their High Courts. Himachal's appeal is pending in the Supreme Court.

📌 What CLAT actually expects

CLAT will not ask you which entry covers water or electricity. It will give you a made-up constitution with a few lists, a law, and a set of facts. Your job is to ask three questions in order: what is this law really about, which list does that subject sit in, and does the law raise money for a service or for the treasury? Most wrong options stop at the law's name.

The backstory

Three Lists and a rulebook

India is a federation: two levels of government, each with its own legislature. To stop them from stepping on each other, the Constitution divides the subjects of law-making in advance. The division sits in Article 246 and the Seventh Schedule, which contains three Lists.

List	Who can make laws	Typical subjects
List I: Union List	Only Parliament	Defence, foreign affairs, inter-State rivers to the extent Parliament declares, banking
List II: State List	Only the State legislature	Police, public order, land, and water: water supply, irrigation, canals, water storage and water power
List III: Concurrent List	Both	Criminal law, contracts, forests, education, and electricity

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Article 246 also sets the pecking order: the Union List comes first, then the Concurrent List, and the State List is "subject to" both.

Anything in no List, including any tax not named in the State or Concurrent Lists, belongs to Parliament under its residuary power. A 1977 central cess on water used by industries was upheld on this footing.

Power to regulate is not power to tax

Here is the detail that decided this case. The Lists keep general subjects (what you may regulate) separate from taxing subjects (what you may tax). The State List lets a state regulate land, and separately lets it tax land and buildings. It lets a state regulate minerals, and separately tax mineral rights.

Water has a regulatory entry: supply, irrigation, storage, water power. But there is no matching State List entry for taxing water. And on electricity, the State List lets a state tax the consumption or sale of electricity, that is, your power bill. It says nothing about taxing generation.

The Constitution says no tax can be levied except by authority of law, and a law counts only if the legislature had power to pass it. No entry, no tax.

Tax or fee?

A state can also charge fees on its own subjects. The difference matters because a fee needs no taxing entry. The Supreme Court explained it in the Shirur Mutt case in 1954: a tax raises money for general public purposes with no special benefit to the payer; a fee is payment for a special service to the person paying, a quid pro quo, Latin for "something for something".

Courts have since relaxed how exact that match must be, but the core test survives. A water charge based on how much water you use looks like a fee; one based on the value of your building looks like a tax on the building.

Why hill states keep trying

Himachal Pradesh, Uttarakhand and J&K host much of India's hydropower. In March 2023 Himachal passed a law imposing a water cess on hydropower generation, with rates rising with the "head", the height the water falls through. Chief Minister Sukhwinder Singh Sukhu told the assembly that water is a state subject and that a hill state with limited sources of income had every right to raise more. It expected around Rs 4,000 crore from 172 projects.

The Centre disagreed. In April 2023 the Union Power Ministry wrote to all states that "any tax/duty on generation of electricity" was "illegal and unconstitutional", adding that power made in one state may be consumed by residents of another. In March 2024 the Himachal High Court struck the cess down as beyond the state's competence. The Supreme Court later stayed its order to refund the cess already collected, and the state's appeals were still pending as of May 2026. Uttarakhand's High Court, by a 2:1 majority, has struck down that state's Water Tax on Electricity Generation Act, 2012, holding it to be a tax on generation.

What the court said

The case: a batch of three petitions by 13 independent power producers, including Mass N Ergy Private Limited, Magpie Hydel Construction Operation Industries and Choudhary Power Projects Private Limited, decided on 29 October 2026 by a Division Bench of Justices Sanjay Dhar and Rajnesh Oswal. The issue: did the erstwhile State of J&K have the power to levy water usage charges on hydropower projects under the Jammu and Kashmir Water Resources (Regulation and Management) Act, 2010?

The principle: the nature of a levy is decided by its substance and actual operation, not the name the legislature gives it. If, in substance, it taxes a subject the legislature cannot tax, it is invalid however it is labelled.

The two sides

The power companies: a hydropower plant's use of water is non-consumptive; the water goes back to the river. So the charge was really a tax on generating electricity, not a fee for using water.
The Union government backed them: states may tax consumption or sale of electricity, not generation, and such a tax ends up on consumers who may live in other states.
The J&K government: water resources are a state subject, and the charges were regulatory.

The reasoning

Look at how it is calculated. The charges were worked out from the head height through which water falls to turn the turbines, not the quantity of water drawn or consumed. That tied the levy to the water's power to generate electricity.
Look at where the money goes. The money was meant to build and buy power projects, fund transmission and distribution, and buy electricity. None of that serves the companies paying.
So it is a tax, and on generation. With no service to the payers it is a tax, and as Indian Express reported, the bench said water usage "cannot be divorced from the generation of electricity, as the same constitutes a single, inescapable event". No State List entry allows that.
Even as a tax on water, it fails. Water has its own regulatory entry, separate from land and minerals, and "there is no taxing entry in the State List in respect of the water".

The enactment of the impugned legislation to the extent it seeks to impose tax on generation of electricity was, therefore, beyond the legislative competence of the erstwhile State of J&K.

— High Court of J&K and Ladakh, 29 October 2026, as quoted by Indian Express

The Reorganisation Act argument

J&K became a Union Territory in 2019. The government argued that when Parliament's Jammu and Kashmir Reorganisation Act, 2019 kept the 2010 law alive, the law gained Parliament's backing. The court called this "an attempt in desperation". Saving or adopting a State law does not turn it into an Act of Parliament, and a law void from the start cannot be cured that way.

The holding: the 2010 Act was declared ultra vires the Constitution to the extent it imposed water usage charges on the petitioners, and the demand notices were quashed. The court also restrained the government from taxing electricity generation "under the garb of water usage charges or any other tax".

When the Lists themselves move: the 42nd Amendment at 50

The Lists are not fixed. Parliament can move a subject from one List to another by amending the Constitution, with ratification by at least half the state legislatures.

The biggest such move came in 1976, during the Emergency. On 2 November 1976 the Lok Sabha passed the 42nd Amendment Bill by 366 votes to four; the President gave assent on 18 December 1976, and the List changes took effect on 3 January 1977. Five subjects left the State List for the Concurrent List:

✓Education, now part of the Concurrent List's education entry, including universities
✓Forests
✓Protection of wild animals and birds
✓Weights and measures (setting the national standards was already Union business)
✓Administration of justice and the organisation of courts below the High Courts

It also added population control and family planning to the Concurrent List, and gave the Union power to deploy its armed forces in any state. The Janata government's 44th Amendment in 1978 deleted the article on deploying forces, but no later amendment sent education, forests or justice back to the states.

Why does it matter? States can still legislate on Concurrent subjects, but a conflicting central law generally prevails. Writing in the Hindustan Times on 28 October, Supreme Court advocate Mukund P Unny called the amendment "the most durable instrument of centralisation" in the Constitution and traced today's fights over NEET and vice-chancellor appointments to it. Indira Gandhi had called it "responsive to the aspirations of the people".

The debate

The ruling is about legal power, not whether hydropower should pay more. But the policy fight behind it is real.

The states' case	The case against generation levies
Water is a state subject, and the rivers run through the state. Its government should be able to earn from them.	Hydropower does not consume water; it goes back to the river. A 2019 parliamentary standing committee on energy saw no rationale for such a cess.
Hill states have limited sources of income, as Himachal's Chief Minister argued, and host projects whose power is sold to other states too.	A generation tax lands in the price of power, so consumers in other states end up paying a tax imposed by a state they cannot vote in.
Himachal's government said the burden would fall on power companies, not on ordinary people.	Developers in Himachal said they would have to pass costs on, and small plants could shut. Projects already give the host state free power as royalty.

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What is still open

The Supreme Court has the final word, and Himachal's appeal is pending. And the case law is not one-directional. In 1997 the Supreme Court upheld a Maharashtra cess on river water that a mill drew for industrial use, charged by volume and treated as land revenue, reading "land" broadly to include flowing water. The J&K reports do not say whether the bench dealt with that ruling. The difference may lie in the facts: a mill takes water away, while a turbine sends it back, and the J&K charge was set by head height, not volume. Whether that difference holds is exactly what an appeal would test.

Principles and terms to know

Principle / term	Plain meaning	How it is applied
Legislative competence	A legislature's power to make a law on a given subject.	First question in any federalism dispute: which List does this law's subject fall in?
Ultra vires	Beyond one's powers. A law made without competence is void to that extent.	The 2010 Act was struck down only so far as it imposed the charges.
Pith and substance	Find the law's true nature and main object, and place it in a List by that. Incidental effects on another List don't matter.	A law really about money-lending stays valid even if it touches promissory notes, a central subject.
Colourable legislation	You cannot do indirectly what you cannot do directly.	Renaming a generation tax a "water charge" does not create power that is absent. Motive is irrelevant; only competence counts.
Regulatory vs taxing entry	Power to regulate a subject does not include power to tax it.	The water entry lets a state regulate water, not tax it.
Tax	Compulsory payment for general public purposes, no special benefit to the payer.	J&K's collections went to building and buying power projects: a tax.
Fee	Payment for a specific service to the payer (quid pro quo).	A volume-based charge for canal water supplied by the state can be a fee.
Repugnancy	A clash between a central and a State law on a Concurrent subject.	The central law generally prevails to the extent of the clash. This is a different question from competence.

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ℹ️ Good to know, not to memorise

Articles: 248 with Union List entry 97 (residuary power), 254 (repugnancy), 265 (no tax without authority of law), 368(2) proviso (ratification by half the states). Entries: State List 17 (water, subject to Union List 56 on inter-State rivers), 18 and 49 (land; taxes on lands and buildings), 50 (taxes on mineral rights), 53 (taxes on consumption or sale of electricity), 66 (fees); Concurrent List 38 (electricity). 42nd Amendment: State List entries 11, 19, 20 and 29 omitted; Concurrent entries 11A, 17A, 17B, 20A, 25 and 33A; Union List 2A and Article 257A (the 44th Amendment, 1978, omitted 257A). Cases: Prafulla Kumar Mukherjee v. Bank of Commerce, Khulna (Privy Council, 1947) and State of Bombay v. F.N. Balsara (1951) on pith and substance; K.C. Gajapati Narayan Deo v. State of Orissa (1953) on colourable legislation; Commissioner, H.R.E. v. Sri Lakshmindra Thirtha Swamiar (Shirur Mutt, 1954) on tax vs fee; R.S. Rekchand Mohota Spinning v. State of Maharashtra (1997) on the river water cess. The J&K court also relied on Section 32(1) of the Reorganisation Act, 2019.

⚠️ Reasoning traps

1. Overlap is not death. Pith and substance does not mean any touch on another List kills a law. Only when the law's true nature lies outside the legislature's List is it invalid. 2. The label decides nothing. "Water usage charge", "cess", "fee": check how the amount is calculated and where the money goes. 3. Regulate does not mean tax. An option saying "water is a State subject, so the state may tax it" skips the separate taxing entry. 4. Competence vs repugnancy. "Who had power at all?" is a competence question. "Both had power, whose law wins?" is repugnancy, and on Concurrent subjects the central law generally prevails. Don't mix them.

How CLAT could test this

Read the passage and apply only the rules it states. Question 5 changes a rule on purpose.

🧩 Worked example

The Constitution of the Republic of Pahadpur divides law-making power between the national Parliament and the legislature of each state. It does so through three lists. Parliament alone may make laws on subjects in the Union List. A state legislature alone may make laws on subjects in the State List. Both may make laws on subjects in the Concurrent List, but if a state law conflicts with a national law on a Concurrent subject, the national law prevails to the extent of the conflict. Any subject, including any tax, that is not mentioned in the State List or the Concurrent List belongs to Parliament alone. The lists separate subjects of regulation from subjects of taxation. The State List includes "water, that is to say, water supply, irrigation, canals, water storage and water power". This allows a state to regulate water, but not to tax it. A state may tax only what a taxing entry in the State List names. The State List's taxing entries include "taxes on land and buildings" and "taxes on the sale or consumption of electricity". No list mentions a tax on the generation of electricity. A state may also charge fees on subjects in the State List. A levy is a fee only if it is charged in return for a specific service that the state renders to the person paying, and the amount collected broadly matches the cost of that service. A levy that raises money for the general purposes of the state is a tax, whatever name it is given. To decide which list a law belongs to, courts look at its pith and substance: its true nature, judged by its main object and how it actually operates. If a law, in its pith and substance, falls within a list on which the legislature may legislate, it does not become invalid merely because it incidentally affects a subject in another list. But a legislature cannot do indirectly what it cannot do directly; a disguise does not create a power that is missing. The motive of the legislature, good or bad, is irrelevant to the question of power. Pahadpur's mountain states host many hydropower plants. The water that drives their turbines returns to the river a short distance downstream. In recent years several states have looked to these plants for revenue, arguing that they bear the costs of dams built on their rivers, while power companies argue that such levies raise electricity prices for consumers in other states.

Q1. The state of Himgiri in Pahadpur passes the Himgiri River Use Charge Act. It requires every hydropower plant to pay Rs 0.40 for each unit of electricity it generates. The money goes into the state's general treasury. Himgiri says the Act is a law on "water power", a State List subject. Which is correct?

AThe Act is valid, because water power is in the State List and the charge is called a river use charge.

BThe Act is invalid, because it is in substance a tax on the generation of electricity, which no State List taxing entry covers.

CThe Act is valid as a fee, because the plants use the river that Himgiri regulates.

DThe Act is valid, because it only incidentally affects electricity, which is a separate subject.

▸ Show solution

Answer: B. The charge is measured by units of electricity generated and goes to general revenue, so in pith and substance it taxes generation. The passage says a state may tax only what a State List taxing entry names, and no list mentions a tax on generation, so that power belongs to Parliament. A relies on the label and on a regulatory entry, both of which the passage says are not enough. C fails because no specific service is rendered and the money goes to general purposes. D misuses incidental encroachment: generation is the very thing being taxed, not a side effect.

🧩 Worked example

Q2. Himgiri builds and maintains a network of irrigation canals. It charges farmers who draw water from these canals Rs 2 per thousand litres. The amount is kept in a separate canal fund used only for repairing and running the canals, and the collections roughly equal the cost of that work. A farmers' group says Himgiri has no power to tax water. Which is most accurate?

AThe charge is invalid, because the State List does not allow a state to tax water.

BThe charge is invalid, because only Parliament may levy any charge connected with water.

CThe charge is valid, because it is a fee for a specific service, canal water supply, and broadly matches the cost of that service.

DThe charge is valid, because a state may tax anything connected with a State List subject.

▸ Show solution

Answer: C. This levy meets both conditions in the passage for a fee: it is charged for a specific service to the payer (supplying canal water) and the amount broadly matches the cost. A fee needs no taxing entry, only a State List subject, and canals are in the water entry. A treats a fee as if it were a tax. B has no basis in the passage. D states the very error the passage warns against: regulating a subject does not give power to tax it.

🧩 Worked example

Q3. Which of the following best explains why, under the passage, a state cannot save a levy simply by calling it a "fee"?

AOnly Parliament may decide what a levy is called.

BThe character of a levy depends on its substance, whether it pays for a specific service or raises general revenue, not on its name.

CAll levies on hydropower plants are taxes, whatever they are used for.

DThe motive of the legislature in naming the levy must be examined by the court.

▸ Show solution

Answer: B. The passage says a levy raising money for general purposes is a tax "whatever name it is given", and that a disguise does not create a missing power. That is the substance-over-label principle. A is not in the passage. C overstates: a charge for a genuine service to a plant could still be a fee. D contradicts the passage, which says motive is irrelevant to the question of power.

🧩 Worked example

Q4. Suppose the Union List contains "inter-state highways". Himgiri passes a Dam Safety Act requiring all dam owners to keep the river banks below their dams clear of obstructions. One effect is that the national highway authority must move a storage yard it had placed on a river bank below a dam, next to an inter-state highway. The authority says the Act is invalid. Applying the passage:

AThe Act is invalid, because it affects a Union List subject.

BThe Act is invalid, because Himgiri passed it in order to inconvenience the highway authority.

CThe Act is valid only if Parliament consents to it.

DThe Act is valid, because in pith and substance it is a law on water storage and dam safety, and its effect on highways is incidental.

▸ Show solution

Answer: D. The Act's main object is the safety of dams and the rivers below them, which falls within water storage in the State List. Its effect on a highway storage yard is incidental, and the passage says incidental effects do not invalidate a law whose pith and substance lies in the right list. A ignores that rule. B is wrong twice: nothing shows such a motive, and motive is irrelevant anyway. C invents a consent requirement the passage never mentions.

🧩 Worked example

Q5. Suppose Pahadpur's Constitution is amended to move "water" from the State List to the Concurrent List. Parliament then passes a National Water Act which says that no state may charge more than Rs 1 per thousand litres for canal water. Himgiri's canal charge from Q2 (Rs 2 per thousand litres) remains on its books. Which is correct?

AHimgiri's charge stands in full, because Himgiri built the canals and the charge is a valid fee.

BHimgiri loses all power over canals, because Parliament has now legislated on water.

CHimgiri's law is void to the extent it conflicts with the national law, so it cannot charge more than Rs 1 per thousand litres, though it may still regulate canals in ways that do not conflict.

DBoth laws apply, and farmers may choose which rate to pay.

▸ Show solution

Answer: C. Once water is a Concurrent subject, both legislatures may legislate on it, but the passage says the national law prevails "to the extent of the conflict". The conflict is only about the rate above Rs 1, so Himgiri's law gives way there and survives elsewhere. A ignores the new conflict rule; it was the right answer only before the amendment. B overstates: a Concurrent subject is shared, not taken away. D has no basis. Notice the shift: under the old lists, the question was competence; after the amendment, it is repugnancy.

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Sources

Frequently asked questions

Can a state tax water used to generate hydroelectricity?

The Himachal Pradesh and Uttarakhand High Courts, and now the J&K and Ladakh High Court, have said no, at least where the levy is really a tax on generation. The State List lets states regulate water and tax the consumption or sale of electricity, but it has no entry for taxing water or electricity generation. Himachal Pradesh's appeal on the point is pending in the Supreme Court.

What is legislative competence?

It is a legislature's constitutional power to make a law on a particular subject. In India it comes from Article 246 and the three Lists of the Seventh Schedule. A law made without competence is ultra vires and void to that extent.

What is the doctrine of pith and substance?

Courts identify a law's true nature from its main object and how it operates, and place it in a List on that basis. If its core falls within the enacting legislature's List, an incidental effect on another List does not make it invalid.

What is the difference between a tax and a fee?

A tax is a compulsory payment for general public purposes with no special benefit to the payer. A fee is charged for a specific service rendered to the payer, so there is an element of quid pro quo. The name used by the law does not decide which one a levy is.

Which subjects did the 42nd Amendment move to the Concurrent List?

Education, forests, protection of wild animals and birds, weights and measures (except establishing standards), and administration of justice with the organisation of courts below the High Courts. It also added population control and family planning. The changes took effect on 3 January 1977.

What is the residuary power of legislation?

Any subject not listed in the State or Concurrent List, including any tax not mentioned in either, belongs exclusively to Parliament. The framers gave it to the Union to keep the Centre strong and to cover matters nobody could foresee in 1950.