This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 09 COLOMBO 001978 
 
SIPDIS 
 
DEPT PASS USTR FOR G. BLUE AND JROSENBAUM 
 
STATE FOR EB/MTA/MST 
 
GENEVA PASS USTR 
 
E.O 12958: N/A 
TAGS: ECON ETRD CE ECONOMICS
SUBJECT: 2005 National Trade Estimate report for Sri 
Lanka 
 
REF: A) STATE 240980 
 
TRADE SUMMARY 
 
¶1.  The U.S. trade deficit with Sri Lanka was $1.7 
billion in 2003, an increase of $14 million from 2002. 
U.S. goods exports in 2003 were $155 million, down 10 
percent from the previous year.  Corresponding U.S. 
imports from Sri Lanka were $1.8 billion, down 0.2 
percent. Sri Lanka is currently the 104th largest export 
market for U.S. goods. 
 
¶2.  The United States is Sri Lanka's largest export 
market and the destination for $1.8 billion (or 38 
percent) of exports, predominantly garments.  Sri 
Lanka's garment industry is heavily dependent on the 
United States, with 63 percent of all garment exports 
bound for the United States.  Sri Lanka's exports face 
many challenges.  The largest export, garments, will 
face increased competition in a quota-free era when the 
WTO Agreement on Textiles and Clothing expires in 2005. 
Competing products from cheaper sources also threaten 
most other sectors. In order to meet these challenges, 
there are new efforts to protect local industries and 
agriculture, diversify exports, expand tourism, improve 
competitiveness and increase foreign employment 
opportunities.  The Government also hopes to take 
advantage of Sri Lanka's strategic location on shipping 
routes, make use of the Indo-Lanka free trade agreement, 
sign free trade agreements with other countries, and 
establish Sri Lanka as a regional hub for manufacturing, 
commerce and transport. 
 
¶3.  Sri Lanka witnessed a change of government in April 
2004, following parliamentary elections.  The current 
government has espoused a shift to a mixed economy from 
the largely free market economic policies of the 
previous government.  The Government's Economic Policy 
Framework has backtracked on the previous government's 
trade liberalization strategy.  It specifically calls 
for protection of small and medium enterprises and 
agriculture. 
 
¶4.  The inability to meet established targets under the 
PRSP led the IMF to put its financing programs on hold, 
and they remain stalled pending discussions between the 
IMF and the Government and, presumably, greater clarity 
of the Government's economic policies.  In the absence 
of program funding and due to rising oil prices, Sri 
Lanka suffered a large BOP deficit in 2004.  Citing the 
accompanying decline in reserves, and need for 
protection, the government has taken several steps to 
control imports and consumption. 
 
¶5.  The Government has created the National Council of 
Economic Development (NCED).  NCED consists of around 18 
clusters representing both private and public sector 
officials looking at various sectors of the economy. 
The Trade and Tariff cluster is charged with designing 
trade policy. 
 
IMPORT POLICIES 
 
¶6.  Sri Lanka's main trade policy instrument has been 
the import tariff.  The tariff structure is subject to 
frequent changes.  The budget for 2005 brought down the 
number of tariff bands to 5 from 6.  Departing from its 
liberalization path, the Government recently imposed a 
new import tax on selected items by way of a levy 
(referred to as a "cess" in Sri Lanka) in light of a 
decline in foreign reserves.  The Government also hopes 
this new tax will protect domestic agriculture and 
industry. 
 
¶7.  Import tariffs and other import charges:  Currently, 
there are 5 tariff bands of 0 percent, 2.5 percent, 6 
percent, 15 percent, and 28 percent.  The highest tariff 
band was increased from 25 percent in 2002 to 27.5 
percent in January 2004 and to 28 percent in November 
¶2004.  The next highest band has been removed and duties 
increased from 20 percent to 28 percent.  Textiles, 
pharmaceuticals and medical equipment are free of duty. 
Basic raw materials are generally assessed a 3 percent 
duty.  Semi-processed raw materials are at 6 percent. 
Intermediate products are at 15 percent and most 
finished products are at 28 percent.  There are also a 
number of deviations from the 5-band tariff policy. 
Tobacco and cigarettes carry duties ranging from 75 
percent to 250 percent.  In addition, there are specific 
duties on certain items, including footwear, ceramic 
products, and agricultural products.  These specific 
duties are aimed at protecting domestic producers.  Some 
items carry an ad-valorem or a specific duty (whichever 
is higher).  There is intermittent use of exemptions and 
waivers.  Imports for export industries enter duty free. 
 
¶8.  Export Development Board (EDB) Levy:  In November 
2004, the Government introduced a new additional tax on 
a range of imports, identified as non-essential.  The 
EDB levy is applied on C.I.F value, and ranges from 10 
percent to 20 percent.  Some of the items can have 
either an ad valorem or a specific duty.  (the higher 
duty applies).  Together with import tariff, the EDB 
levy will effectively take import duties on most 
finished goods to over 48 percent of import value.  The 
incidence of duty on items with specific duties will be 
higher.  These taxes, together with other charges 
applicable on imports (mentioned below) will move Sri 
Lanka's tariff structure steeply upwards. 
 
¶9.  There are other charges on imports: 
a) 10 percent import duty surcharge; 
b) 1.5 percent ports and airports development levy (PAL) 
on imports; 
c) Value Added Tax (VAT) of 0, 5, 15 and 18 percent; 
d) excise fee on some products such as aerated water, 
liquor, beer, motor vehicles and cigarettes.  Excise fee 
on motor vehicles was increased sharply in 2004; 
e) Export Development Board surcharge on all imports 
where the customs duty is more than 45 percent; and 
f) port handling charges. 
g) surcharge of 0.25 percent on import duty (to fund the 
National Action Plan for Children, to be finalized and 
implemented in 2005) 
 
¶10.  VAT and excise taxes are charged on both imports 
and domestic producers.  Import prices are increased by 
5 percent (by adding a deemed profit margin) when 
calculating the VAT and excise duty. 
 
¶11.  According to US trade data, total value of imports 
affected by the EDB cess will be about $5 million out of 
a total of about $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 analyses.  Many 
US companies export products to Sri Lanka from ports and 
plants outside the US.  The Embassy has received 
complaints from affected US exporters regarding the new 
"prohibitive" tariff regime. 
 
Import Licensing 
 
¶12.  Over 300 items at the 6-digit level of the 
Harmonized Tariff Schedule (HST) code remain under 
license control, mostly for health, environment and 
national security reasons. There is a 0.1 percent fee on 
import licenses. 
 
Customs Barriers 
 
¶13.  The Government of Sri Lanka implemented the WTO 
Customs Valuation Agreement in January 2003 and follows 
the transaction value method to determine the c.i.f. 
value.  The scheme has operated quite successfully. 
Major companies have not faced problems.  Sri Lanka 
Customs complains of companies undervaluing goods 
brought in from Dubai and China.  Customs is also in the 
process of installing an Electronic Data Interchange 
(EDI) system to support an automated cargo clearing 
facility.  When implemented, this system should improve 
customs administration and facilitate trade. 
 
STANDARDS TESTING, LABELING AND CERTIFICATION 
¶14.  At present there are 85 items that come under the 
Sri Lanka Standards Institution (SLSI) mandatory import 
inspection scheme.  These importers have to obtain a 
clearance certificate from the SLSI to sell their goods. 
SLSI accepts letters of conformity from foreign 
laboratories, but retains the discretion to take samples 
and perform tests. 
 
¶15.  There is discussion within some sections of health 
and environment sectors to introduce a labeling 
requirement for imports of bio-engineered food, but no 
requirements are in place currently. 
 
¶16.  A new labeling and advertising regulation was 
published in January 2004.  This relates to the 
information that should appear on a label of any 
prepackaged food product offered for sale, transported 
or advertised for sale in Sri Lanka, including imported 
food.  The regulation is currently scheduled to come 
into effect on January 1, 2005.  Implementation, 
however, could be delayed further. 
 
¶17.  Poultry and meat: The ban on US poultry has been 
lifted subsequent to the USDA notification to the World 
Animal Health Organization (OIE) that the US is free of 
Highly Pathogenic Avian Influenza (HPAI).  An unofficial 
ban on the import of chicken to protect the local 
industry was revoked in November 2004 following a 
Government decision to allow poultry imports into the 
country.  The primary beneficiary of the foreign chicken 
ban was a Singaporean-owned poultry company in Sri 
Lanka, which dominates the domestic market with an 
approximately 80 percent market share. Imports of beef 
from the United States are banned due to fears of bovine 
spongiform encephalopathy. 
 
GOVERNMENT PROCUREMENT 
 
¶18.  Sri Lanka is not a member of the WTO Government 
Procurement Agreement. Government procurement of goods 
and services is mostly done through a public tender 
process.  Some tenders are open only to registered 
providers.  The Government publicly subscribes to 
principles of international competitive bidding, but 
charges of corruption and unfair awards continue.  There 
are no professional evaluation experts in Sri Lanka. 
Tender board members are routinely pulled from other 
jobs. 
 
¶19.  The Government recently created a National 
Procurement Agency (NPA) to introduce an improved system 
of procurement. 
 
EXPORT SUBSIDIES 
 
¶20.  Exporting companies approved by the BOI, are 
generally entitled to corporate tax holidays and 
concessions.  Exporters receive institutional support 
from the Export Development Board in marketing.  Sri 
Lanka Export Credit Insurance Corporation (SLECIC) 
issues insurance policies and guarantees to exporters. 
Imports for exporting industries and BOI approved 
projects usually are exempted from VAT. For some others, 
the VAT is refunded.  There are no major complaints 
regarding VAT refunds.  The airports and ports levy on 
imports for export processing is 0.25 percent of CIF 
value. 
 
INTELLECTUAL PROPERTY (IPR) PROTECTION 
 
¶21.  Local agents of U.S. and other international 
companies representing recording, software, movie, and 
consumer product industries continue to complain that 
lack of IPR protection is damaging their business. 
Piracy levels are very high for sound recordings and 
software, making it difficult for the legitimate 
industries to protect their market and realize their 
potential in Sri Lanka.  Sri Lanka is a party to major 
intellectual property agreements, including the Berne 
Convention for the protection of literary and artistic 
works, the Paris Convention for the protection of 
industrial property, the Madrid Agreement for the 
elimination of false or deceptive indication of source 
on goods, the Nairobi Treaty, the Patent Co-operation 
Treaty, the Universal Copyright Convention and the 
Convention establishing the World Intellectual Property 
Organization (WIPO). Sri Lanka's intellectual property 
law is based on the WIPO model law for developing 
countries.  Sri Lanka and the United States signed a 
Bilateral Agreement for the Protection of Intellectual 
Property Rights in 1991, and Sri Lanka is a party to the 
WTO Trade-Related Intellectual Property Rights (TRIPS) 
Agreement.  In November 2003, a new intellectual 
property law came into force. 
 
¶22.  This law meets both U.S.-Sri Lanka Bilateral IPR 
Agreement and TRIPS obligations to a great extent.  The 
law now governs copyrights and related rights, 
industrial designs, patents for inventions, trademarks 
and service marks, trade names, layout designs of 
integrated circuits, geographical indications, unfair 
competition and undisclosed information.  All 
trademarks, designs, industrial designs and patents must 
be registered with the Director General of Intellectual 
Property.  Infringement of IPR is a punishable offense 
under the new law, and IPR violations are subject to 
both criminal and civil jurisdiction.  Relief available 
to owners under the new law includes injunctive relief, 
seizure and destruction of infringing goods and plates 
or implements used for the making of infringing copies, 
and prohibition of imports and exports.  Penalties for 
the first offense include a prison sentence of 6 months 
or a fine of up to $5,000.  The penalties could double 
for the second offense.  Enforcement, however, is a 
serious problem, as is public awareness of IPR.  The 
domestic implementing legislation under the old law was 
very weak and the Government did not act as an enforcer 
of IPR laws.  Aggrieved parties must seek redress of any 
IPR violation through the courts, a frustrating and time- 
consuming process. 
 
¶23.  The Sri Lankan police uncovered a Malaysian-owned 
CD/VCD production facility in a Colombo suburb, in 
October 2004.  It is alleged to have produced pirated 
copies of music, movie and software violating rights of 
several US companies.  The police investigation is still 
on going.  The police have also conducted a few other 
raids of stores selling pirated movie and music CDs. 
 
¶24.  The Director of Intellectual Property and 
international experts have begun IPR legal and 
enforcement training for customs and police officials. 
In September 2004, a group of five lawyers and a judge 
attended an IPR program in the US under the 
International Visitor program of the U.S. State 
Department.  An active US Embassy-led IPR working group 
comprising affected industries is also working closely 
with the Sri Lanka Government to pursue more aggressive 
enforcement and enhance public awareness.  It will take 
time before new procedures and court precedents are 
established under the new law. 
 
¶25.  In addition, Sri Lanka needs to ratify and conform 
to the WIPO Performances and Phonograms Treaty (WPPT) 
and the WIPO Copyright Treaty (WCT).  Sri Lanka is 
completing its accession to the WTO Information 
Technology Agreement. 
 
SERVICES BARRIERS 
 
¶26.  Sri Lanka has opened the services sector to foreign 
investment. Foreign investment of 100 percent is allowed 
in a range of service sectors such as banking, 
insurance, telecommunications, tourism, stock brokerage, 
construction of residential buildings and roads, supply 
of water, mass transportation, telecommunications, 
production and distribution of energy, professional 
services and the establishment of liaison offices or 
local branches of foreign companies.  These services are 
regulated and subject to approval by various government 
agencies.  The screening mechanism is non-discriminatory 
and, for the most part, routine.  Some other services 
have restrictions on foreign investment. 
¶27.  Banking:  Foreign commercial banks are allowed to 
open branch offices in Sri Lanka, subject to an economic 
needs test and approval by the Central Bank.  Foreign 
investors are allowed to hold 100 percent equity in 
local banks.  Bank ownership, however, is subject to 
limits on individual ownership.  Individual/company 
share ownership of a bank is limited to 15 percent of 
equity; group of companies 20 percent and promoters 25 
percent.  Currently, there are twelve foreign commercial 
banks operating in Sri Lanka, including one US bank. 
 
¶28. Listed below are the main constraints faced by the 
commercial banking sector: 
a) restriction of banking business by government 
ministries and departments to state-owned banks; 
b) restriction on speculative foreign exchange trading 
by commercial banks; Banks are allowed to buy or sell 
foreign exchange for commercial transactions only; 
c) a VAT on profit before tax and salaries; 
d) inadmissibility of electronic documents in courts; 
and 
e) the absence of laws to protect and facilitate 
electronic commerce. Several laws are being drafted to 
permit electronic transactions; They include an 
electronics transactions law, a computer crimes law, a 
data protection law, and a code for administration of 
ATMs and Credit Card Operations. 
f) absence of Anti Money Laundering legislation.  Draft 
legislation is under preparation. 
 
Insurance 
 
¶29.  One hundred percent foreign investment is allowed 
in insurance.  Foreign insurance companies are required 
to incorporate in Sri Lanka to undertake insurance 
business.  The Government has recently privatized the 
state-owned insurance companies.  Sri Lankans with 
access to foreign currency can obtain foreign insurance 
policies.  Resident Sri Lankans are otherwise prohibited 
from obtaining foreign insurance policies except for 
health and travel.  A major insurance company has 
reported difficulty in penetrating government business 
due to corruption.  Sri Lanka's insurance regulatory 
body retains powers to introduce minimum and maximum 
tariffs for various insurance products. 
 
Telecommunications 
 
¶30.  The telecommunications sector is the most dynamic 
service industry in Sri Lanka.  There is one fixed wire 
line operator, Sri Lanka Telecom (SLT), two wireless 
local loop operators and four mobile phone operators. 
Several private operators also provide radio paging, 
data communication, internet service and satellite link- 
ups.  The Government of Sri Lanka sold a 35 percent 
stake in SLT to NTT of Japan in 1997.  The Government 
sold a further 12.5 percent stake of SLT in 2003 to the 
public. SLT has recently acquired a mobile phone 
operator.  Due to the past monopoly status under 
Government control, SLT continues to own most of the 
national telephone infrastructure (including main 
switches) and the only two international cable landing 
stations, controls access to the international fiber 
optic cables and continues to dominate the sector 
affecting the competitiveness of other operators.  All 
other operators are privately owned. 
 
¶31.  In early 2003, the Government liberalized 
international telecommunications and issued 33 (non- 
facilities based) gateway licenses, ending the SLT 
monopoly over international telephony.  Since then, 
international outgoing call rates have dropped sharply. 
However, since new licensees are not allowed to 
establish terrestrial facilities, they are forced to use 
infrastructure of existing domestic operator networks 
(including SLT and Lanka Internet, which has U.S. 
equity) to terminate or originate international calls. 
 
¶32.  A key problem facing the telecommunications sector 
is restricted interconnection.  The Regulatory Authority 
has failed to enforce regulations provided under the 
Telecommunications Act to establish an efficient and 
transparent interconnection regime.  SLT, the wireless 
operators and some of the mobile operators have formed 
an unofficial cartel to control local gateways and 
restrict interconnection to other operators.  This has 
adversely affected the operations of most of the other 
operators and new international gateway licensees who 
are unable to make use of their licenses due to lack of 
interconnection by the local exchange operators.  This 
situation has resulted in illegal bypass by some 
operators.  Spectrum management is also weak and 
frequencies are not properly allocated which affect 
telecommunication operators.  The Regulatory Agency, 
under a new management, has plans to improve the 
regulatory regime. 
 
Quotas on foreign films 
 
¶33.  The state-owned National Film Corporation's (NFC) 
approval is required to import films. There is a quota 
restriction on imports of English language films, which 
is currently set at 100 per year.  The quota does not 
amount to a barrier due to low annual imports.  There 
are controls on screening of films: except for 6 top 
cinemas, all other theaters in Sri Lanka are required to 
screen at least 60 percent local films.  The theaters 
exempted from the rule are free to screen foreign films 
without any restrictions.  The NFC also charges a tax of 
$0.31 per ticket from screenings.  Part of the fee on 
tickets for local films is paid by the NFC to local film 
producers.  NFC, which is instituted by an Act of 
Parliament, has wide powers that can be used to 
effectively restrict foreign film imports. 
 
Professional Services 
 
¶34.  There is no formal national policy on professional 
services.  In practice, many foreign doctors, nurses, 
engineers, architects, and accountants work in Sri 
Lanka.  Most of them are attached to foreign companies. 
Sri Lanka has not made any WTO commitments on the 
presence of natural persons, and national treatment is 
not accorded to foreign nationals working in Sri Lanka. 
Most foreign nationals do not have statutory recognition 
in Sri Lanka and cannot sign documents presented to 
government institutions or regulatory bodies. 
 
¶35.  The Immigration Department grants resident visas 
for expatriates and professionals whose services are 
required for projects or by companies approved by the 
Board of Investment.  The Department also grants visas 
for expatriates required for projects approved by the 
government.  Non-BOI companies such as banks can also 
recruit expatriate staff. Sri Lanka also operates a 
resident guest visa scheme for foreign investors and 
professionals who are recommended by the relevant 
Ministry. 
 
Legal Services 
 
¶36.  A person can provide legal consultancy services 
without being licensed to practice law in Sri Lanka. 
Foreigners are not allowed to practice law (appear in 
courts) and do not have statutory recognition in Sri 
Lanka.  Sri Lankan citizens with foreign qualifications 
need to sit for exams conducted by the Sri Lanka law 
college in order to practice and register in the Supreme 
Court. 
 
Education 
 
¶37.  Movement of people for education is not restricted. 
Foreign students are allowed to study in private schools 
in Sri Lanka, or follow other professional study 
courses. Foreign teachers also work in private schools 
in Sri Lanka. 
 
Doctors 
 
¶38.  The Sri Lanka Medical Council allows qualified 
foreign doctors and medical specialists to work in Sri 
Lanka.  They have to be sponsored by a medical 
institution or a non-government organization, and are 
required to obtain temporary registration from the Sri 
Lanka Medical Council (SLMC).  Many Indian doctors have 
been issued resident work visas recently to work in an 
Indian-owned hospital in Sri Lanka. 
 
Accountants 
 
¶39.  All big four international accounting firms are 
represented, together with most of the second tier 
international firms.  The Institute of Chartered 
Accountants of Sri Lanka (ICASL) membership is required 
to conduct audits and discharge other statutory duties 
in Sri Lanka. 
 
Engineers and architectural services 
 
¶40.  Over the years, most foreign funded projects have 
used foreign consultants and contractors. 
 
INVESTMENT BARRIERS 
 
¶41.  Sri Lanka welcomes foreign investment.  One hundred 
percent foreign investment is allowed in most 
manufacturing and services sectors. 
 
¶42.  Foreign investment is not permitted in the 
following businesses: non-bank money lending; pawn 
brokering; retail trade with a capital investment of 
less than $1 million (with one notable exception:  the 
BOI permits retail and wholesale trading by reputed 
international brand names and franchises with an initial 
investment of not less than $150,000); providing 
personal services other than for the export and tourism 
sectors; coastal fishing; education of students under 14 
years for local examinations; and the awarding of local 
university degrees.  Investment in additional sectors is 
restricted and subject to screening and approval on a 
case-by-case basis, when foreign equity exceeds 40 
percent: shipping and travel agencies; freight 
forwarding; higher education; mass communications; 
fishing; timber-based industries using local timber; 
mining and primary processing of non-renewable national 
resources; growing and primary processing of tea, 
rubber, coconut, rice, cocoa, sugar and spices; and, 
finally, the production for export of goods subject to 
international quota.  Foreign investment restrictions 
and government regulations also apply to air 
transportation, coastal shipping, lotteries, large-scale 
mechanized gem mining, and "sensitive" industries such 
as military hardware, dangerous drugs and currency. 
 
¶43.  The BOI offers a range of incentives to both local 
and foreign investors.  To qualify for BOI incentives, 
investors need to meet minimum investment and minimum 
export requirements.  In general, the treatment given to 
foreign investors is non-discriminatory.  Even with 
incentives and BOI facilitation, however, foreign 
investors can face difficulties operating here. 
Problems range from difficulties in clearing equipment 
and supplies through customs to getting land for 
factories.  The BOI encourages investors to locate their 
factories in BOI-managed industrial processing zones to 
avoid land allocation problems.  Investors locating in 
industrial zones also get access to relatively better 
infrastructure facilities such as improved power 
reliability, telecommunication and water supplies. 
 
¶44.  Government treatment of foreign investors in the 
privatization process has been largely nondiscriminatory 
with foreigners buying controlling interest in some 
companies.  The privatization process has not always 
been transparent, however.  For instance, in 2003, the 
government sold part of the retail operations of state- 
owned Ceylon Petroleum Corporation (CPC) to a foreign 
entity without a formal tender process.  A major U.S. 
supplier that had earlier acquired a government-owned 
lubricant plant has complained that the government had 
reneged on the terms of an exclusivity agreement 
extending up to mid-2004. 
 
¶45.  Access to local credit markets by foreign-owned 
companies incorporated in Sri Lanka was liberalized in 
2003 and such firms can now borrow rupee funds without 
the approval of the Central Bank.  Foreign-owned 
companies, BOI-approved firms and exporters can access 
dollar denominated loans.  Applications for dollar 
denominated loans from local firms are considered on a 
case-by-case basis and not encouraged. 
 
Capital Repatriation 
 
¶46.  Sri Lanka has accepted Article VIII status of the 
IMF and has liberalized exchange controls on current 
account transactions.  There are no surrender 
requirements on export receipts, but exporters need to 
repatriate export proceeds within 120 days to settle 
export credit facilities.  Other export proceeds can be 
retained abroad.  Currently, contracts for forward 
bookings of foreign exchange are permitted for a maximum 
period of 360 days for the purposes of payments in trade 
and 720 days for the repayment of loans.  There are also 
no barriers, legal or otherwise, to the expeditious 
remitting of corporate profits and dividends for foreign 
enterprises doing business in Sri Lanka.  Remittance of 
business fees (management fees, royalties and licensing 
fees) is also freely permitted.  Funds for debt service 
and capital gains of BOI approved companies exempted 
from exchange control regulations are freely permitted. 
Other foreign companies remitting funds for debt service 
and capital gains require Central Bank approval.  Prior 
to Central Bank approval they also need a tax clearance 
certificate.  All stock market investments can be 
remitted without prior approval of the Central Bank. 
Investment returns can be remitted in any convertible 
currency at the legal market rate. 
 
¶47.  Controls on capital account (investment) 
transactions usually prohibit foreigners from investing 
in debt and fixed income securities.  One exception has 
been the Central Bank's local market dollar denominated 
bond issues in 2001, 2002 and 2004, which were opened to 
foreign investors.  The government has proposed allowing 
foreign investment in corporate debentures and 
government bonds.  Local companies require Central Bank 
approval to invest abroad.  The process of granting 
approval for such investments was streamlined in 2002, 
resulting in an increase in approvals. 
 
ELECTRONIC COMMERCE 
 
¶48.  See above section under Services Barriers on 
Banking. 
 
OTHER BARRIERS 
 
¶49.  Delays in litigation are a problem. For example, a 
US investor with a substantial investment in an export 
manufacturing company has faced lengthy delays in a 
court case over a large insurance claim.  The company 
instituted legal action in June 1999 and court 
proceedings are still on-going with the company 
suffering financial losses as a result.  In many 
disputes, defendants resort to obtaining injunctions, 
stay orders or postponements to drag cases on for years. 
The Government has established a commercial court to 
hear business litigation, but delays are still common. 
 
¶50.  In order to support the domestic software industry, 
private sector companies using locally produced software 
will be allowed to depreciate 100 percent of the cost in 
the first year, according to 2005 budget proposals.  The 
depreciation allowance on foreign software is only 25 
percent.  The public sector is required to give 
preference to locally produced software and ensure at 
least 50 percent local value addition when using foreign 
software. 
 
¶51.  Transfer tax on property:  The Government has 
recently re-introduced a 100 percent transfer tax on 
property purchased by foreign nationals and companies. 
For this purpose, a company is defined as an entity with 
at least 25 percent foreign equity.  Apartments above 
the third floor of condominium buildings, land for the 
development of large housing schemes, hospitals and 
large infrastructure are exempted from the tax. 
Foreigners maintaining US$ 150,000 in a bank account in 
Sri Lanka will be given concessionary treatment.  In 
addition to the tax, the Government will announce 
prohibited geographical areas for purchase by non- 
citizens.  Property transfers to foreigners were 
exempted from tax in 2002. 
 
¶52.  Ranking of significant barriers: 
1)  Imports:  High duties on imports of finished 
products and food items. 
2)  IPR:  Lack of IPR protection. 
3)  Investment:  100% land tax on foreigners. 
4)  Banking: Restriction of government banking business 
to state owned banks. 
5) Government Procurement: Lack of transparency and 
corruption. 
6) Telecommunications: Dominance of telecommunications 
infrastructure by partly state-owned Sri Lanka Telecom 
(SLT) and lack of interconnection to other telecom and 
internet operators. 
LUNSTEAD