When Exemptions Become Taxes: What the Adani Power Verdict Means for Governance

X: @vivekbhavsar

Mumbai: The Supreme Court’s ruling in the Adani Power case is not about electricity alone. Nor is it about a single company’s refund claim. It is a clear judicial intervention against a pattern of fiscal governance where the executive continued to collect a levy long after its legal basis had collapsed.

At the heart of the judgment lies a simple constitutional principle: taxation requires legislative authority. Notifications cannot substitute Parliament. Exemptions cannot be inverted into levies. And executive persistence cannot override judicial finality.

The core constitutional breach

Under the Customs Act, customs duty is leviable only on goods imported into India. Electricity generated within the country—even inside a Special Economic Zone—is not an import. An SEZ may enjoy a distinct fiscal treatment, but it is not foreign territory.

Despite this, the Union government attempted to impose customs duty on electricity supplied from SEZs to the domestic market through a series of notifications issued under Section 25 of the Customs Act. That provision exists to grant exemptions, not to create a new charge.

The Supreme Court’s verdict is unambiguous: the power to exempt is not the power to tax. Using delegated legislation to invent a levy where no charging provision exists amounts to a colourable exercise of power.

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From legal error to governance concern

What makes the case institutionally significant is not merely the initial illegality, but what followed.

In 2015, the Gujarat High Court struck down the levy. The Union government challenged that ruling—and failed. The Supreme Court declined to interfere. The law, therefore, stood settled.

Yet the levy continued in a modified form. Rates were altered. Notifications were replaced. Collections went on. Refunds were resisted on technical grounds.

The Supreme Court has now made it clear that a levy declared unconstitutional cannot be revived by changing its numerical form or administrative packaging. Once the authority to tax is absent, no notification—old or new—can supply it.

Judicial finality and executive compliance

The judgment also addresses a deeper governance issue: resistance to judicial finality.

Courts do not decide cases in instalments. When a constitutional court declares a levy to be without authority of law and that declaration attains finality, the executive is expected to comply—not to relitigate the issue through successive notifications and procedural defences.

The Court’s observation that judicial pronouncements are binding commands, not advisory opinions, is a reminder that rule of law depends as much on obedience as on adjudication.

Why the verdict matters beyond this case

The implications of the ruling extend well beyond the power sector or SEZ policy.

It draws a firm boundary around the limits of delegated legislation, retrospective taxation through executive action, and the practice of enforcing levies first and justifying them later.

For investors, it reinforces legal certainty. For citizens, it underscores that unconstitutional taxes cannot be retained by the State. For the administration, it serves as a warning that governance by workaround will not survive constitutional scrutiny.

In that sense, the Adani Power verdict is not a corporate win or a revenue loss. It is a reaffirmation of a basic constitutional order: taxation flows from law, not convenience—and once courts settle the law, governments are bound to follow it.