INFLUENCE DECISIONS OF PRODUCTION

The First point system of taxation encourages backward/Vertical integration. For example, a supplier of leather garments, may find that his cost of production goes up merely because of cascading effect of taxes on the production/distribution chain before he effects the purchase. To further illustrate, the Semi-finished manufacturer pays tax on his CST purchases of rawhides, the finished leather producer pays tax on his local purchase of semi-finished leather, and eventually the Garment manufacturer pays tax on the finished leather.

Thus, the Garment manufacturer is induced to integrate all these activities and ensure that he pays tax only on the raw hides.

This makes an undue technological demand on the garment manufacturer. Alternatively, the garment manufacturer becomes uncompetitive.

Under the Multi-point system of taxation, tax is levied at every stage of sale/purchase. This creates an incentive to companies to integrate all along the production/distribution line.