D H S Jayewardena, chairman of listed Distilleries Corporation of Sri Lanka Plc (DCSL) told shareholders in the annual report that a sharp increase in 'artificial toddy', a key raw material for alcohol making, has been observed.
He alleged that Sri Lanka's excise department is turning a "Nelsonian Eye" towards toddy contractors involved in the business.
Toddy that is rejected by DCSL for not meeting quality standards were being bought by the contractors, which could even cause deaths among consumers, he said.
"..[T]he Excise Department confesses to not knowing of the transport of such illegal sub-standard produce, although transport permits are given unabated which allows for the movement of such toddy," Jayawardena alleged.
In Sri Lanka hard alcohol is heavily taxed, creating a state-induced incentive to smuggle or produce tax unpaid products. Excise authorities raid such operations from time to time.
Meanwhile Jayewardene said smuggled imported spirits are also being used to produce hard liquor.
"We see the paint industry and baby cologne industry increasingly becoming a façade for the importation of spirits in order to pass through customs, while also becoming a front for the illegal manufacture and sale of liquor..," Jayawardena said.
"It is important that the Regulator within the Excise Department remains true to the diktats of his Office, ensuring that the market remains legal and clean, by working to eliminate corruption and ensuring that the law is enforced.
"At present, the illegal market is a sizable portion compared to the legal market and if infused into the mainstream, the government can be assured of even more revenue which can in turn be invested in the vital infrastructure of the country."
Industry sources say alcohol is a sector where the island's elected ruling class got involved in retail licenses and supporting large scale tax unpaid alcohol-making as rule of law gradually diminished in Sri Lanka over the past four decades.
Legal analysts have said that rule of law and justice was undermined by the island's 1972 and 1978 constitutions where a once-independent public service was gradually made subservient to the elected ruling class.
Many retail licenses held by those connected to the elected ruling class are 'leased' to those who actually operate the premises, industry sources say.
Though small moonshine or 'kasippu' producers have always been a hallmark of the sector, industry sources say large scale distilleries - including those with licensed operations - that produce tax unpaid products, usually operate with political backing.
Falls in legal alcohol sales in the past have been associated with political backing for one or more distilleries involved in tax unpaid products, they say.
In the year to March 2012, the firm's revenues grew to 15.2 billion rupees from 13.5 billion rupees but profits fell to 4.3 billion rupees from 7.7 billion a year earlier.
The firm said 36 billion rupees of excise duty collected from customers had been paid to the state.
Jayewardene said there was an increase in demand for 175 millilitre and 375 millilitre bottles from people who were 'budget conscious' but chose to buy legal products.
DCSL's fully owned subsidiary Periceyl, had seen a 75 percent sales growth in former war zones in the north and the east where a 30-year battle with Tamil Tiger separatists raged until 2009.
"It is noted that during this time, illegal bottling was done in the jungles by some licensed manufacturers aided by terrorists, establishing a thriving albeit illegal industry," Jayewardena told shareholders in another startling revelation.
Jayewardene praised the government for allowing retail licenses to be owned by manufactures through a recent change to the country's excise law.
"This is assuredly a steppingstone in alleviating the illegal practices that have become characteristic of the current market and is certainly a step in the right direction to maintaining and strengthening a healthy legal industry," he said.