Sri Lanka has been a source of precious gems since antiquity — sapphires, rubies, cat's eyes, alexandrite, and star stones are all found in the alluvial gravels of the Ratnapura district, about 100 km southwest of Kandy. The Kandy gem trade is well established and several dealers operate near the lake with reputations built over decades. The National Gem and Jewellery Authority showroom in Colombo is the most reliable source of certified stones; in Kandy, established dealers with written guarantees and return policies are your best protection.
Do not buy gems from anyone who approaches you in the street or who a tuk-tuk driver recommends. The scam is ancient, practiced, and almost always successful: a convincing story, a beautiful stone, a receipt, and then a worthless piece of glass. Established shops with physical addresses and decades of business are a different matter entirely.