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A fictitious street scene showing a consumer purchasing illicit cigarettes (AI-generated). Photo credit: Thomas Schmid/MS Copilot
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FOREST’s Simon Clark. Photo credit: FOREST
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Illicit cigarettes on display at an informal street stall in India. Photo credit: TII
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Contraband cigarettes detected and intercepted by the ABF at Brisbane International Airport. Photo credit: ABF
Excessive tax hikes may unwittingly promote and encourage illegal practices instead of curtailing them.
Governments around the world have implemented excise taxes on tobacco products as part of their efforts to reduce smoking rates and recover healthcare costs associated with tobacco-related diseases. The strategy is rooted in public health logic: increase prices and consumers will be discouraged from smoking. However, when taxes become excessively punitive, they can have unintended consequences. Rather than quitting, many consumers instead seek cheaper alternatives, fueling a robust illicit tobacco trade managed by local and international criminal organizations. Australia, the UK, and India provide striking examples of how high taxes may be contributing to the expansion of black-market tobacco, despite ongoing efforts to curtail it.
Australia: enforcement vs. reality
Australia has some of the most efficient law enforcement agencies in the world, and the Australian Border Force (ABF) has made impressive progress in intercepting illegal tobacco shipments. From July 1, 2024, to May 31, 2025, the ABF recorded 21,530 detections and seized 2.3 billion cigarette sticks and 394.6 tons of loose-leaf tobacco, totaling over 1,901.85 tons of tobacco products. The estimated evaded duty from these seizures is nearly AU$3.95 billion (approx. US$2.56bn), excluding GST.
Despite these strong enforcement actions, the volume of intercepted products suggests a far bigger problem. A spokesperson from the ABF stated to Tobacco Asia that their officers remain vigilant at every entry point to Australia’s border, and that these detections underscore the ABF’s commitment to protecting the community and the economy from the harms of illicit tobacco. But the spokesperson also emphasized that every purchase of illicit tobacco supports organized crime, funding corruption and other serious criminal activities.
Recent examples from New South Wales further illustrate the scale of the issue. In July 2025, the ABF intercepted major consignments including 14 million illicit cigarettes and more than 3 tons of loose-leaf tobacco. Additional cargo uncovered during that period contained a combined total of 33.8 million cigarettes. These figures, while staggering, likely only represent the tip of the iceberg, underscoring the difficulty of eradicating illicit trade even with robust enforcement.
The UK: a decline in legal sales, a rise in illicit consumption
In the UK, similarly high excise taxes have reached a tipping point where they may no longer be effective. Simon Clark, director of FOREST (Freedom Organization for the Right to Enjoy Smoking Tobacco; forestonline.org), warned that when 86% of the cost of a typical pack of 20 cigarettes goes to excise duty, many smokers simply turn to illegal tobacco instead of quitting.
Clark cited a recent survey commissioned by FOREST that showed that 70% of adults in the UK believe that buying tobacco from the black market is understandable given the high legal prices. He pointed out that years of aggressive tax hikes have led to diminishing returns, as consumers adapt and seek alternatives. A 2025 report by KPMG commissioned by Philip Morris International (PMI) supports Clark’s view. According to the report, one in four cigarettes consumed in the UK in 2024 were illicit. This amounted to 5.9 billion sticks, despite a drop of nearly 0.8 billion from the previous year.
During his interview with Tobacco Asia, Clark argued that further excise hikes will only worsen the situation by funneling even more consumers into the illicit market. Legal retail businesses suffer as a result, while government revenues continue to decline.
Europe: a cross-border crisis
Across the European Union (EU), the illicit tobacco problem has reached historic levels. According to the PMI-commissioned 2025 KPMG study, EU smokers consumed 38.9 billion illicit cigarettes in 2024, a 10.8% increase compared to 2023. This led to an estimated tax revenue loss of US$14.9 billion. France was the worst affected country, consuming 18.7 billion illicit cigarettes, which represented 37.6% of total consumption. The Netherlands saw its illicit cigarette share double to 17.9%.
These figures vividly highlight the dangers of extreme tax policies. In France, the total tax burden on a pack of 20 cigarettes is 84.7% of the pack price. In the Netherlands, it is an astonishing 110%. This has rendered cigarettes prohibitively expensive for many consumers, leading them to turn to the black market. KPMG’s study also indicates that counterfeit brands such as Marlboro, Winston, Lambert & Butler, and Richmond accounted for 68% of all counterfeit consumption across 38 European countries.
Meanwhile, the European Commission reportedly is weighing staggeringly sharp increases in tobacco taxes that, if ratified, would be implemented across the 28 EU member states. The proposal is seeking a 258% jump on rolling tobacco and a 139% rise on cigarettes, according to an internal impact assessment reviewed by Politico. Alongside these hikes, the Commission also intends to introduce excise taxes on vapes and heated tobacco products for the first time.
India: tax arbitrage and criminal incentives
India is facing a mounting challenge as legal cigarettes become increasingly unaffordable due to steep and repeated tax hikes. These tax increases have created significant arbitrage opportunities that criminal networks are eager to exploit. Repeated tax hikes have, as a result, led to a sharp rise in the illicit cigarette trade, with legal cigarettes being among the least affordable globally.
Data from Euromonitor International shows that in 2023, India recorded 33.2 billion illicit cigarette sticks, amounting to 26.1% of the overall cigarette market. Between 2011 and 2023, volumes of illicit cigarettes increased by 70% while legal cigarette sales declined by 9%. It is clear that, rather than discouraging consumption, increasingly higher taxes have driven consumers toward smuggled products, undermining government revenues and public health outcomes.
In the light of such developments, the Tobacco Institute of India is advocating for a more balanced policy, warning that excessively high taxes only encourage organized crime and erode the legal industry. The institute has consistently called for a reduction in tax burdens and a stronger focus on enforcement to disincentivize the illicit trade and protect stakeholders such as tobacco farmers and legal businesses, including cigarette manufacturers.
The misleading statistics on smoking rates
Governments often publish statistics that appear to show declining smoking rates, citing reduced legal sales and increased taxes as proof of success. However, these figures may be misleading. They tend to measure consumption of taxed, legal products only, but ignore untaxed or illegal ones. In India the share of legal cigarettes in overall tobacco product consumption dropped from 21% in 1981/82 to just 10% in 2023/24. However, during that time period, overall tobacco consumption actually increased by 49%. This suggests that smokers haven’t quit in any meaningful numbers; they simply switched to cheaper alternatives and, yes, untaxed, thus unregulated products. In other words, while legal consumption is falling, illegal consumption is rising. Official statistics may therefore paint an incomplete picture.
The consequences of this shift toward illicit tobacco affect several stakeholder groups. Local tobacco farmers are particularly hard hit because smuggled cigarettes rarely use domestic crops, leading to economic hardship in agricultural regions. And globally speaking, legal tobacco product retailers face declining sales and increased theft, while governments lose billions in excise revenue that could have funded public services. In addition, end consumers are exposed to unregulated products, which may be more harmful. In conclusion, it is rather clear who pays the price. It is everybody, except the criminal gangs who rake in extremely healthy profits and which are well worth the risk of some shipments being intercepted by law enforcement.
Other drivers of the illicit trade
Though excessive taxation is a major factor, it is not the only one. National packaging regulations, such as oversized pictorial warnings on cigarette packs that have become mandatory in many markets, have driven many consumers toward foreign brands that lack such warnings, falsely suggesting they are “safer.” Where premium brands have become unaffordable to the average consumer, dirt-cheap counterfeits may often serve as most welcome substitutes. In addition, online platforms have become convenient direct-to-consumer channels for contraband. Tax inconsistencies between countries enable cross-border smuggling. And last but not least, globalization and increasing digital access further complicate enforcement efforts, allowing criminal networks to scale their operations while evading scrutiny.
Enforcement alone is not enough
Even with strong enforcement, as seen in Australia, the UK, and other nations around the world, illicit tobacco stubbornly persists. The 2024 “Causes and Control of Illegal Tobacco” report concluded that enforcement must be paired with rational taxation policies. Without addressing affordability and regulation, punitive taxes only bolster illegal markets. Strict and effective enforcement, while critical, must be complemented by balanced fiscal policies to reduce the incentive for consumers and criminal networks alike.
Rethinking the strategy
History has shown that reducing cigarette taxes can help fight smuggling. In the early 1990s, Canada reduced cigarette taxes and successfully curbed the country’s large-scale illicit trade. It is not inconceivable that such a strategy wouldn’t work elsewhere, too. Reduced taxes could help the local legal industry regain market share at the expense of criminal networks, improve government revenues, and revive struggling tobacco farming sectors livelihoods without actually significantly increasing overall consumption. Studies indicate that moderate taxation, when combined with strong law enforcement, can strike a sustainable balance between public health goals and economic stability.
The growing illicit tobacco trade across major economies around the globe sends a clear message that current tax strategies may be counterproductive. While the intentions behind these policies are commendable, they often ignore the realities of consumer behavior and the enticing profitability of the illegal trade. If governments wish to reduce smoking rates and uphold public health, they must develop smarter, more nuanced approaches that combine thoughtful regulation, fair taxation, and robust enforcement. Failure to do so will only empower criminals and perpetuate the cycle of lost revenue and unregulated consumption.