NEW GSL TARIFF FEES' NEGATIVE BUT MINIMAL

UNCLAS SECTION 01 OF 03 COLOMBO 001951

SIPDIS

SENSITIVE

DEPT PASS TO USTR FOR JROSENBAUM, USDA FOR JARGUETE;
COMMERCE FOR A.STERN; NEW DELHI FOR CRUSSELL

E.O 12958: N/A
TAGS: ECON ETRD CE ECONOMICS
SUBJECT: NEW GSL TARIFF FEES' NEGATIVE BUT MINIMAL
IMPACT ON US EXPORTS TO SRI LANKA

REF: A) COLOMBO 1858 B) COLOMBO 1905


1. (SBU) Summary: As recently reported (Reftels),
the GSL has imposed new tariff surcharges on non-
essential items, though many agricultural, food,
household and other consumer products are affected.
The new levy ranges from 10-20 percent and does not
affect the bulk of US exports to Sri Lanka. This
levy is one more example of the current Government's
desire to pursue import substitution policies and
revert to protectionist measures in an effort to spur
local production and raise revenue. End summary.


2. (U) As previously reported (Ref A),the
Government of Sri Lanka (GSL) has introduced a new
import duty, by way of an Export Development Board
(EDB) levy (a "cess" in local terminology) on
selected imports with effect from November 4, 2004.
The levy ranges from 10 to 20 percent. It will be in
addition to the normal import tariff, apply to
imports from all sources (irrespective of
preferential trade agreements),and will be charged
on c.i.f. value. The levy will not apply to imports
for export industries, which are generally exempted
from import duties. Most of the top US exports to
Sri Lanka will not be affected, as they are not
captured under any categories subject to the new tax.
These unaffected US exports include electrical
machinery and equipment, machinery, wheat, medical
equipment, cotton, yarn, textile fabric, paperboard,
medicine and pharmaceutical products.


3. (U) The tax will, however, affect a number of
other US imports from perfumes to food products (see
para 8). Since the Most Favored Nation (MFN) import
duty on most of these items is already at 28 percent,
the levy will increase the effective import duty to
over 48 percent (except on items which have
preferential duties under trade agreements including
the Indo-Lanka FTA, where the new levy will be
assessed on the lower, preferential duty rate).


4. (U) In addition to the EDB levy, several other
taxes have also been changed and increased recently.
The value added tax (VAT) on non-essentials was
increased from 15 to 18 pct. The import duty
structure was changed from 6 bands to 5 bands, and
the highest band was increased from 27.5 pct to 28
pct. A ports and airport levy (PAT) was increased
from 1 pct to 1.5 pct of c.i.f. price.


5. (SBU) According to US trade data, total value of
imports affected by the EDB levy could be around US$5
million, out of a total of approximately US$143
million annual US exports to Sri Lanka. Total effect
on US exports could be much higher as US sourced
products sent via other trading hubs, or manufactured
by US entities abroad, are not captured in the US
export data used to compile this analysis. Most of
the companies we talked to, such as Gillete and
Proctor and Gamble, export their products from ports
and plants outside the US.


6. (SBU) The Embassy has begun to receive complaints
from affected US exporters regarding the new
"prohibitive" tariff regime. For example, Commercial
Links, which exports apples, grapes and pulses to
Colombo, said their fruit exports have stopped
completely due to the new tariff structure, which has
increased the duty paid price of these items by 30 to
40 percent. Pulses are not affected, as the levy is
not imposed on "essential" food items. Both
Gillette and Proctor and Gamble are facing increased
tariffs on their toiletries and cosmetics. According
to Gillette, their main problem is with "Oral B"
toothbrushes which have been levied a piece rate duty
of Rs 10 (about 10 US cents),prompting the company
to consider pulling its Oral B range off the market.
"Pringles" potato chips sold by P&G has been levied a
20 percent or Rs 15 per kg duty. P&G has been forced
to hold several containers of goods, thus incurring
demurrage charges.


7. Comment: The US exports outlined below are
affected by the new levy. Post has raised its
concerns about these changes with the Government.
Given the fact that the levy has been charged on
other, larger trading partners, the wobbly state of
GSL finances, and the general protectionist sentiment
of the current Government, it is unlikely we will see
much relief. Nonetheless, we will continue to press
both from the perspective of harm done to US
products, as well as the overall opportunity costs to
the economy from moving in the wrong direction on
trade liberalization. End comment.


8. The following lists US exports to Sri Lanka (2003
figures) that would be subject to the new levy:

-------------- --------------
HS Number-- Product US export- ---New Levy(d)
Value USD
-------------- --------------
--------------
Food Products
--------------
0805 Oranges 223,100(a) 20pct or Rs 15/kg
0806 Grapes 712,000 20pct or Rs 15/kg
0808 Apples 196,000 15pct
200520 Potatos preserved
189,400 20pct or Rs 15/kg
2009 Fruit Juice 69,600 20pct or Rs 15/kg
2103 Sauces 115,200 10pct or Rs 15/kg
2104 Soups 25,000 10pct or Rs 15/kg
2106 Other food preparations (nes)
147,000 15pct or Rs 25/kg
2209 Vinegar 59,000(a) 15pct or Rs 10/kg
1902 Pasta 21,400 10pct or Rs 10/kg
1905 Biscuits, cakes, bread
11,500 10pct or Rs 10/kg
0207 Meat of poultry (chicken, turkey)
193,000 15pct or Rs 50/kg
1602 Prepared meat49,300 15pct or Rs 15/kg
0406 Cheese 30,200 15pct
0404 Whey 6,700 15pct or Rs 20/kg
1806 Chocolate and other food with cocoa
65,000 15pct or Rs 15/kg
--------------
Other items
--------------
3303 Perfumes and toilet waters
213,800 20pct or Rs 25/kg
3304,3305,3307 Hair, beauty preparations
78,000 20pct or Rs 25/kg
391810 Floor or wall coverings of PVC
8,400 20pct or Rs 20/kg
392490 Toilet articles of plastic
157,000 20pct or Rs 20/kg
401110 Tires for motor cars
27,300 10pct or Rs 15/unit
4203 to 05 Leather clothes
17,500 20pct or Rs 20/kg
4202 Leather travel goods, bags
33,200(a) 20pct or Rs 20/kg
6505 Headgear 380,000(a) 15pct
69 Ceramic ware
54,800 20pc
7013 Glassware 38,600(a) 10pct or Rs 10/kg
7018 Glassbeads 34,400 10pct or Rs 10/kg

841510 Air conditioners
77,600(b) 10pct
841451 Fans 22,000 10pct
8418210090 refrigerators
31,000(a) 10pct
852431 Disks for laser reading systems
522,000 1pct
852430 Discs for laser reading systems
128,200 1pct
9603 Toothbrushes (C) 10pct or Rs 10/unit
960810 Ball point pens, fountain pens, felt pens
189,000 10pct or Rs 10/unit
-------------- --------------
(a) Jan-Sept 2004
(b) 2002
(C) Indirect imports from Gillette
nes, not elsewhere specified
(d) When there is a specific duty and an ad valorem
duty, the higher absolute duty will apply.
Source: GSL Ministry of Finance and USITC
LUNSTEAD