This paper presents a novel control scheme for seven levels diode clamped multilevel inverter (DCMLI) topology based shunt hybrid active power filter which can compensate both dynamic reactive power and current harmonics in three phase three wire medium voltage distribution power systems as against many literatures that compensate fixed reactive power. It is on account of this novel control method, it can obtain better compensating performances compared with conventional fixed reactive power and harmonic compensation control. Dynamic reactive power compensation is supplied both active and passive filter parts of SHAPF with fixed dc link voltage. And also control algorithm for proposed SHAPF has shown its feasibility in suppressing harmonics produced by nonlinear loads. Theoretical analyses and simulation results are obtained from an actual industrial network model in PSCAD. The simulation results are demonstrated that harmonic compensation performance meets the IEEE-519 standard.