The Federation of Indian Chambers of Commerce & Industry has not only called for a reduction in the corporate tax rate to 30 per cent, it has also suggested gradual decrease in the tax rate to 25 per cent in the next two to three years.

In its pre-Budget memorandum, citing examples of Belgium, Canada, Germany, Japan, the United Kingdom and the United States, where smaller firms are taxed at lower rates, the chamber has asked for a still lower rate of 20 per cent for small companies.

A lower tax rate would provide more money to the corporate sector for ploughing it back for expansion, diversification and growth. Also, lower tax rate encourages voluntary compliance by widening the tax base, Ficci said.

On surcharge, Ficci has asked the finance ministry to impose it only under compelling circumstances, such as an external emergency.

Ficci has strictly opposed the surcharge by calling it a permanent feature of the tax structure, which is not based on rationality.

Ficci has criticised the Finance Act, 2003, which has levied a 12.5 per cent dividend distribution tax on domestic companies. "The government has no long-term policy on how dividend should be distributed," the memo said.

It has also called it double taxation - as the firm first pays a tax on profit made, and then again, on the dividend distributed.

Dividend distribution tax has a cascading effect when there is a multiple layer of corporate structure.

Therefore, Ficci has suggested that multiple dividend distribution transaction should either be excluded from the levy of additional income-tax on dividend distributed by another company, or such a company should be allowed tax credit on dividend distributed from the amount of dividend on which the other company has already paid additional income-tax.