At present, India imposes a basic customs duty of 100-150 per cent and additional customs duty of 25-150 per cent on wines and spirits. The total incidence of tax is between 250-550 per cent depending on the import price of products.

The proposed legislation would retain the basic duty but abolish the ACD. It will also empower states to impose an extra levy equivalent to the excise on domestic wines and spirits. This will bring imported and domestic products on an equal footing, the sources said.

As the ACD is much higher than the maximum of 60 per cent excise on Indian Made Foreign Liquor, the retail price on imported wines and spirits would fall drastically.

The move is aimed at addressing the concerns of the US and European Union, which have complained against India at the World Trade Organisation on high level of duties.

India fears if the cases in WTO are investigated, many more taxes apart from ACD may come under the scanner.

However, with WTO process taking five to six months, India would have its new duty structure in place and the required legislation passed.

The decision to introduce a legislation for abolishing additional customs duty came only a few weeks after the US followed the EU to approach the WTO on the issue. EU had moved the WTO in November last year, while the US approached the global trade body early this month.

Both the US and the EU argue India imposes an additional duties on top of basic customs duty, making imported wines and spirits much costlier compared to locally-made liquor.

EU agriculture commissioner Mariann Fischer Boel had also raised the issue during her visit to India on March 6.

Commerce Minister Kamal Nath had then hinted at a possible cut in tariffs on imported wines and spirits in view of the growing demand from trade majors.

Meanwhile, though India is addressing the concerns of the US and EU, the concerns of manufacturers of Indian Made Foreign Liquor have not been addressed as the US and EU continue with their stand on not recognising Indian spirits as 'whisky' because they are made from molasses and not grain.

The genesis of the problem lies in the definition of whiskey as laid down by World Customs Union more than two decades ago.

"At that point of time when the WCU was categorising as whisky only those spirits made from grain, India did not object," the sources added.