The 14-month-old Sukhwinder Singh Sukhu-led Congress government suffered another setback on Tuesday when the Himachal Pradesh high court declared the water cess levied on hydropower generation unconstitutional.

The decision of the division Bench, comprising justice Trilok Chauhan and justice Satyen Vaidya, came on a writ petition filed by 40 hydropower companies in the high court last year, challenging the imposition of the water cess.

Soon after taking charge, the Sukhu government decided to impose the cess on power projects in the cash-strapped state to generate ₹1,800 crore. The Himachal Pradesh Water Cess on Hydropower Generation Bill was introduced in the assembly on March 14, 2023, and passed on March 16, 2023. It replaced the Himachal Pradesh Water Cess on Hydropower Generation Ordinance, 2023, promulgated on February 15 last year.

The Himachal Pradesh Water Cess Commission issued notices to 173 power-producing companies to collect the cess amounting to ₹871 crore from March to July last year. Some private companies complied, but those in the public sector moved the high court. One of the petitioners,Everest Power Private Limited, urged the court to declare the Act unconstitutional and quash it.

“The company said that Sections 10 and 15 of the Himachal Pradesh Water Cess from Hydro Power Generation Act, 2023, and Rule 7 of the Himachal Pradesh Water Cess from Hydro Power Generation Rules, 2023, as apply to existing projects, may be declared to be unconstitutional and may be quashed and set aside,” counsel Rajnish Maniktala said.

“In the alternative, any amount of cess recovered by the respondents under the provisions of Himachal Pradesh Water Cess from Hydro Power Generation Act, 2023, may be ordered to be refunded along with interest at 12% per year,” he said.

The company has been generating power from the 100-MW Malana II Hydroelectric Project in Kullu district.

Last year, the central government had shot down the Himachal Pradesh government’s bid to generate ₹1,800 crore by imposing water cess on hydel companies, terming any additional charges or duties on power generation unconstitutional.

In a letter to all state chief secretaries on October 25, the Union energy ministry reiterated that no state has the authority to impose water cess. The government had cited Articles 286, 287, and 288 of the Constitution, emphasising that imposing such fee on thermal, hydro, wind, and solar power generation is beyond the jurisdiction of the states. Yet, the state government enacted the Himachal Pradesh Water Cess Hydro Power Generation Act, 2023, and set up a commission to oversee tax collection.