Toddy, a popular alcoholic drink made from the fermented sap of the coconut flower, is not subject to taxes.
But it is also used to manufacture a stronger drink known as arrack, which is about 35 per cent alcohol by volume and which is taxed.
Government spokesman Gayantha Karunathilaka said an easing of regulations on the industry six years ago had led to an increase in production, but tax revenues had declined because there was no mechanism for monitoring production.
He said the government would introduce new laws and start monitoring the quantity of toddy harvested in Sri Lanka, which heavily taxes alcohol.
"Under the new laws, there will be a regulatory mechanism to monitor toddy production and collect taxes accordingly," Karunathilaka said.
Sri Lanka once had around 50,000 toddy tappers, who climb coconut trees at dawn to collect the milky white sap from coconut flowers.
That has fallen to an estimated 7,000 and practitioners say the craft is dying as young Sri Lankans are put off by the low wages and high risk.
Toddy tappers often fall, particularly during monsoon rains or in windy weather.
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