ILLEGAL tobacco is booming across Australia, funding international criminal gangs, and costing taxpayers more than $1 billion each year.

And the introduction of plain packaging for legal cigarettes has failed, according to a report released this morning.

That report states that ­tobacco consumption in Australia will rise this year for the first time since 2003.

Demand for cheap counterfeit and contraband cigarettes is accelerating, driven by excise increases on legitimate tobacco.

And shops dispensing ­illegal tobacco do so with ­apparent impunity, despite a fine of up to $340,000 for selling a single packet.

The Tobacco Plain Packaging Act, passed in 2011, made Australia the first country to remove all logos, colour and design from cigarette packets.

But a report compiled by the international auditing firm, KPMG, and released exclusively to the Herald Sun, shows that while sales of legal cigarettes and tobacco have slipped slightly in the past 12 months, surging demand for counterfeit and contraband cigarettes and chop chop tobacco has more than made up that shortfall.

The KPMG report was commissioned by big players in the legal tobacco industry.

It involved analysing consumers' preferences and ­collecting 12,000 discarded cigarette packets.

Three years ago, then prime minister Kevin Rudd announced a 25 per cent increase in tax on cigarettes along with the plain packaging plan, the government convinced the changes would slash tobacco consumption by 6 per cent.

But - based on the survey - smokers have been driven to purchase illicit tobacco products, none of which displays the mandatory health warnings.

Despite the bust last month of one illegal tobacco importation ring and the discovery of a huge haul of illegal tobacco in 16 shipping containers at Melbourne's docks, that is the tip of the iceberg, according to KPMG.

In that raid, Victorian police arrested 10 people and seized 71 tonnes of tobacco along with 81 million cigarettes.

The haul would have avoided $67 million in excises. Tellingly, guns and other weapons were also found.

But KPMG estimates that 1433 tonnes of illegal tobacco has entered Australia in the last 12 months, an increase of 154 per cent.

It calculates that illicit tobacco is 13.3 per cent of total Australian sales and getting towards a market share enjoyed here by the world's biggest manufacturer, Imperial Tobacco.

Contributing to the problem is that Australians are paying not much short of $20 for a packet of cigarettes, while the same or equivalent brands in our region might be as low as $1.08 in countries such as Vietnam, Cambodia, the Philippines, Indonesia or South Korea, a common source of our illicit tobacco.

Taxes represent about 70 per cent of the cost of a packet of cigarettes in Australia and will rise a further 50 per cent in the next four years.

Two years ago the Australian Crime Commission reported that organised crime was involved in the importation of illicit tobacco.

"It's costing the industry a lot of money," said Scott McIntyre, corporate affairs manager for British American Tobacco Australia.

"The impact of plain packaging on our market has been nothing.

"All it's doing is pushing people to the illegal market."