A recent report by Australia’s Senate has put the country’s growing black market back in the spotlight. Australia’s experience shows why taxation, regulation and enforcement must be considered together to tackle illicit trade.
The report is the latest indication that Australia’s illicit tobacco market has become a serious challenge for the government, law-enforcement authorities, legitimate retailers and communities.
There is no single cause of illicit trade. However, the situation in Australia demonstrates how a widening price gap between duty-paid and illicit cigarettes, restricted access to regulated smokeless alternatives, and insufficient deterrence can combine to create an increasingly attractive market for criminal operators.
The issue is not whether tobacco should be regulated or taxed. The question is whether policies are designed and implemented in a way that achieves their intended objectives without creating opportunities for an illicit market to grow.
BAT believes an effective response requires a coordinated approach: proportionate and predictable fiscal policy, evidence-based regulation, meaningful penalties and properly resourced enforcement. Adult smokers who would otherwise continue to smoke should also have access to regulated Smokeless Products, while strong safeguards prevent underage access.
A public-health policy with wider consequences
Organised crime has gained a significant foothold in illicit tobacco and Vapour Products. Even after more than A$300 million was committed to tackling the illicit market from January 2024, crime has continued to grow, creating potentially serious consequences for public health, crime and the national economy.
Organised criminal groups now control much of the supply and distribution of illicit nicotine products. Australia has experienced hundreds of firebombing’s, as well as extortion, robberies and deaths connected with conflict over the illegal market. Theo Foukkare, chief executive of the Australian Association of Convenience Stores, has described illegal tobacco as more than half of the market and the vaping market as being supplied almost exclusively by organised crime groups.
Read more in The Omni™ - A Tale of Two Countries: NZ and Australia.
Why enforcement alone may not be sufficient
The Australian government has committed more than A$300 million since 2024 to measures targeting illegal supply routes and retailers. Recent operations have included co-operation between the Australian Border Force and Chinese authorities to seize 60 million cigarettes, with a combined duty evaded over A$92 million, that arrived in Sydney from Shanghai.
Stronger border controls, adequately resourced enforcement and penalties capable of deterring illegal activity are all necessary. But enforcement operates against powerful economic incentives. Criminal suppliers can undercut legal prices because they avoid excise, taxation and the compliance costs borne by legitimate manufacturers, distributors and retailers.
There is no single solution. Effective action requires balanced and predictable fiscal policy alongside enforcement, meaningful penalties, secure supply chains and international co-operation. Crucially, enforcement capacity should be established alongside, or ahead of, material tax changes rather than being added after an illicit market has become entrenched.
Cigarettes and Smokeless Products require different treatment
The policy debate should also distinguish combustible cigarettes from Smokeless Products. Vapour Products, Heated Products and Oral Nicotine Pouches have different product characteristics and we believe should be regulated in a way that appropriately reflects the available evidence concerning their risk profiles relative to cigarettes; they should not automatically be placed within fiscal frameworks originally designed for cigarettes.
Our position is clear - excise rates should reflect product risk profiles relative to cigarettes, with combustible tobacco bearing the highest taxes and Smokeless Products taxed lower. The purpose is to preserve a visible financial incentive for adult smokers who would otherwise continue to smoke to switch completely to Smokeless Products. These products contain nicotine, are not risk free and are addictive.
Fiscal design must still be accompanied by safeguards. These include clear product definitions, product-quality and safety standards, measures to prevent underage access, responsible marketing requirements and effective action against non-compliant suppliers.
Read Fiscal Treatment of Smokeless Products in The Omni™ for more information.
Rebalancing the policy response
The report from the Australian Senate described the situation as a historic public-policy failure and recommended pausing further excise increases and substantially reducing the tax burden. The government is not bound by those recommendations and has rejected calls for an immediate change of direction, emphasising the public-health rationale for existing policy and the need to tackle organised crime.
Australia’s experience does not show that taxation has no role in tobacco control. It shows that taxation cannot be designed in isolation. Excise, product regulation, enforcement capacity and adult consumer demand interact. If one element is pushed beyond what the wider system can support, the result may be declining legal sales and revenue without an equivalent reduction in total nicotine consumption.
The objective should be a regulated market that helps prevent underage access, safeguards adult consumer choice, supports efforts to combat organised crime and encourages adult smokers who would otherwise continue to smoke to switch completely to Smokeless Products.
Achieving that requires proportionate regulation, credible enforcement and a fiscal system that recognises the differences between product categories.