The wine trade is raising a toast to the significant reduction of the excise fee levied by the government of the southern state of Karnataka, whose capital Bangalore is India's Silicon Valley and the third most valuable wine market. Karnataka has reduced the excise fee per bulk litre of wine from 33% of the duty-paid price to a flat rate of Rs 70.

It means that the excise fee, effectively, has come down to Rs 52.50 for every 750ml bottle of wine. The new rule came into effect from April 1, a date that marks the beginning of the 2006-07 financial year.

India follows a two-tiered taxation system for spirits, wine and beer, and it's becoming a serious bone of contention with the European Union and UK's Scotch Whisky Association. On top of the basic customs duty, countervailing duty, special additional duty and a 2% education cess levied by the central (federal) government, the wine importers have to pay separate label registration charges in each of the states (provinces) in whose markets they wish to operate and a 'vend fee' or 'excise fee' per bottle. So, the wines that five-star hotels import under their duty-free quotas cannot escape taxation by the states.

The reduction is significant because Karnataka is the backyard of India's booze baron (and airline operator) Vijay Mallya, who has been opposed to any kind of concessions for imported alcoholic beverages. The state government's move will make imported wine more competitively priced with respect to domestic labels, which, observers believe, are overpriced. Karnataka is where India's major winery, Grover Vineyards, is located within a short drive outside Bangalore. Will the move turn the heat on Grover's wines from foreign competition? Industry observers are unanimous in saying 'yes'.