Unconsumed Power Can’t Be Taxed: Karnataka HC

The Karnataka High Court has held that the supply of electricity to ensure minimum demand, without actual consumption of electricity, does not amount to a sale and does not enable the state to levy tax on the tariff for the supply of electricity. Further, the state is competent to levy tax under Entry No. 53, List II of the Seventh Schedule, only on actual consumption or sale of electricity. With that, Section 3(1) of the Karnataka Electricity (Taxation on Consumption) Act, 1959, as amended by Act No. 7 of 2003 and Act No. 5 of 2004, imposing tax on electricity charges, was declared unconstitutional.

The case was filed by the Karnataka Textile Mills Association (KTMA) and Federation of Karnataka Chambers of Commerce and Industry against the amendment made by the state government to the Karnataka Electricity Act imposing tax on the minimum charges levied on supply.

The court held that if the consumer is taxed on the ‘minimum tariff’ charged for ensuring constant supply, then it amounts to taxation on electricity that is not yet sold but only agreed to be sold, which is beyond the scope of the entry in the seventh schedule. Here, the supply of electricity to a specified point at a place belonging to the consumer, from where the consumer can tap the electricity for consumption, is only an ‘agreement to sell’ electricity and not a ‘sale’ of electricity.

However, the petitioners must claim reimbursement separately, as they had not pleaded that they had not passed on the tax liability to their customers. Nevertheless, since the federation had absorbed the tax burden, they were allowed refund but only from the year that the petition was filed and not since the impugned provision came into effect.

The court further noted that the benefit of the judgment was available only to the petitioners who had approached the court and not to others who had not challenged the provision of law and paid the tax.