When tea first arrived in Britain from China in the 1660s it was extremely expensive, made much more so in the following century by customs duties which greatly encouraged smuggling.
Its high price was a stimulus also to counterfeiters, who made imitation teas out of the dried leaves of hawthorn, ash, sloe and other native British plants. These were coloured with various noxious substances, such as verdigris and copperas, and sold to dealers under the slang name of smouch (more formally and euphemistically, British tea).
So pervasive was this practice (one estimate is that three million pounds weight were being made each year at one point) that Parliament passed an Act in 1725 condemning it, not only because it cheated the Revenue but because it resulted in the “destruction of great quantities of timber, woods and underwoods”.
The source of the word is unknown, though it was also current in the same period as a dialect term for a kiss (hence the modern smooch), and as an offensive slang term for a Jew, and later turns up in the US as a verb meaning “to acquire dishonestly; to pilfer” (for example, in Huckleberry Finn: “So I’ll mosey along now, and smouch a couple of case-knives”). It may also be linked with smutch, a variant of smudge, “to make dirty”.