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They are right, people will not stop smoking only because the packaging is dull.
Because they lost advertising opportunity.
People recognize the brand by the packaging before even reading the brand name. This way your country just make any type of advertising for the cigarettes useless. And maybe as a collateral effect some younger people will not start to smoke since they will not see the advertising, but as far as I know people don't start to smoke because the package is cool.
It's more subtle than that. Obviously no one who already smokes is going to say "Oh, the packet isn't as pretty as it used to be, guess I'll quit smoking now."
It's about the big, long-term picture. Companies spend money on branding and advertising because it works. You create the perception that your product is for a certain type of person, which makes them more inclined to buy it. By making cigarettes boring, you make them less appealing, and on average less people will smoke.
The proof is in the pudding. Social attitudes to smoking in Australia have totally flipped within a generation or two. It used to be something that everyone did. It's now mostly seen as a gross habit.
Fine, but if that the point, a more honest (intellectually) thing to do would be simply ban cigarettes advertising. The way it is done seems to me something like "I want to ban this but I don't want to be the one that do it".
We're way ahead of you mate, all tobacco advertising was banned in Australia 30 years ago. Plain packaging is just the latest in a long line of moves designed to de-normalise smoking, and the tobacco companies have fought against it every step of the way.