Small and Medium Enterprises (SMEs) in Nepal’s wine industry hold strong potential for sustainable regional development by supporting rural employment, women’s participation and local fruit-based value chains. Yet their growth is constrained by a fundamental structural policy contradiction: these firms are classified as Small and Cottage Industries for development purposes but are simultaneously taxed and regulated as large liquor manufacturers. This study examines how this dual identity shapes their sustainability and competitiveness. Using a qualitative comparative policy analysis based on legislative documents, fiscal data [7] and international benchmarking, the study finds that excise duties on domestic wine increased by approximately 564% over two decades; far higher than those applied to imported wine or beer, while advance tax payments and manual compliance procedures intensify liquidity stress and administrative burden. Rigid production standards and a blanket advertising ban further restrict innovation, branding and market visibility. These pressures weaken all three pillars of sustainability and significantly limit strategic decision- making for SMEs. Policy reforms aligned with EU, OECD and Australian models; such as graduated excise rates, deferred payment mechanisms, flexible production standards and targeted promotional allowances, are recommended to harmonize industrial and fiscal policy. Addressing this incoherence is essential for transforming Nepal’s wine SMEs into competitive, resilient and sustainable rural enterprises.