SC upholds states’ right to change industrial policy in a 25-year-old dispute

The Supreme Court on Wednesday ruled that the government had ruled that Reliance Industries Ltd. It upheld its authority to withdraw electricity tax exemptions for power plants, ruling in favor of Maharashtra in a 25-year-old dispute with companies such as.

A bench comprising Justices PS Narasimha and Alok Aradhe upheld the validity of the state’s notifications dated April 1, 2000 and April 4, 2001 to withdraw the exemption and impose electricity tax on energy produced and consumed by industries.

However, the court ruled that the withdrawal should not take effect immediately. It was stated that the notifications will come into force only after a period of one year from the relevant dates and will give companies time to adjust their financial situations and activities.

In our view, the interests of justice would be adequately served by treating the impugned notifications as if they would come into force only after the expiration of a reasonable notice period…a period of one year would constitute reasonable notice,” the court said in its judgment.

Reliance Industries and Jindal Poly Films Ltd, another company involved in the dispute, are yet to respond to emailed questions on Wednesday.

Legal experts have flagged risks to policy certainty.

“From an investment perspective, the concern is not the task itself but the uncertainty it brings,” said Keyur D. Gandhi, managing partner of Gandhi Law Associates. “Trade energy projects are often predicated on long-term cost stability. Later withdrawal of exemptions undermines predictability.”

The dispute dates back to Maharashtra’s 1993 industrial policy that promised exemptions. Electricity tax to encourage industries to install private power plants and reduce dependence on the grid. However, in April 2000, the state withdrew the exemption and imposed a tax of 30 cents per unit. This was later reduced to 15 kuruş per unit by a notification dated 2001.

The move triggered lawsuits as companies claimed they made long-term investments with the promise of tax breaks.

In 2009, the Bombay High Court ruled in favor of the companies, quashing the state’s order and granting full exemption for the period between April 2000 and April 2005, as per the said order. He described the government’s action as arbitrary and lacking proper justification.

The Maharashtra government challenged the high court’s decision in the top court.

However, the Supreme Court did not agree with this view. He noted that tax exemptions are a policy prerogative, not a permanent right, and that the government retains the power to modify or withdraw them in the public interest.

The Supreme Court also emphasized that such policy changes must be implemented fairly, without causing immediate hardship to businesses that have previously benefited from the incentives.

The court noted that the electricity tax is an important source of revenue for the state and that decisions regarding exemptions must balance industrial growth with fiscal stability. “The decision regarding the tax or exemption… involves balancing the need to stimulate industrial growth with the need to maintain financial stability,” the decision said.