The illicit trade in tobacco includes illegal methods of manufacturing, selling, or buying real or counterfeit tobacco without paying tobacco taxes. In the United Kingdom (UK) the sale of illicit tobacco products was estimated in the year 2000 to have caused a loss of £3 billion in tax revenue.
The tobacco industry has often argued that increases in tobacco taxes lead to increases in illicit trade. While tax and price differences in neighboring countries/regions may increase the incentives for illicit trade, the UK experience shows that a comprehensive tobacco control strategy can increase government revenues through higher tobacco taxes, achieve significant reductions in smoking, and successfully reduce levels of illicit trade.
A crucial component of the UK’s tobacco control policy has been high tobacco taxation, which the state has implemented as both a public health and a revenue-generating measure. Following a series of tax increases, the illicit tobacco trade increased rapidly in the 1990s. This trend was due, in particular, to the well-documented tobacco manufacturer practice of increasingly producing and exporting cigarettes in volumes much greater than the known demand in their stated markets. These products were then smuggled into the UK with no duty paid.