Highly-placed sources said the fourth slab of income tax was likely to attract a higher rate which could range between 35 to 40 per cent and the people to be covered would be those who have annual incomes exceeding Rs 2.5 lakh.

The argument being given in favour of introducing a new slab for those in the higher income bracket is that it would not be an unpopular measure with the large sections of people and and, at the same time, it would help the government in mopping up more revenue. It shall also, at least partially, overcome the huge revenue shortfall income tax collections suffered during the last financial year.

The step, it was pointed out, wouldnot undo the rationalisation of direct taxes which former finance minister P Chidambaram tried to achieve by sharply reducing income tax rates in the last budget. However, on the other hand, the move would make the income tax structure more in tune with realities in the country by adhering to a progressive rate of taxation.

The logic will be that those who earn more have more capacity to contribute to the exchequer.

The sources pointed out that Chidambaram's decision to drastically reduce income tax rates from 15 per cent, 30 per cent and 40 per cent for different income slabs to 10 per cent, 20 per cent and 30 per cent did not yield the expected revenue because the focus continued to be on fixed salary earners. The broadening of taxes and introduction of the Permanent Account Numbers (PANs) also did not help matters in any significant manner.

The government, it was stated, expected to collect Rs 21,700 crore from the personal income tax during 1997-98, but actual collections as per the revisedestimates worked out to be Rs 18,700 crore.

More importantly, at the existing rates and slabs of income tax, the government is estimated to collect only Rs 20,930 crore in 1998-99, which would be less than the estimate of the last year.

As it is impossible for the coalition government to restore tax rates to 1996-97 levels for people in the lower income tax brackets, the only viable option is to tap resources at the higher end.

This, sources said, would be done by consolidating the gains made from the successful implementation of the VDIS. Although 77.5 per cent of the total collections amounting to Rs 10,050 crore has gone to the states, it is felt in the finance ministry that the recurring gains should accrue to the central exchequer.

Although the government is committed to not reopening voluntary disclosure of income scheme (VDIS) cases, the fact of the matter is declarants do not get any immunity from paying taxes in future. A number of those who have paid taxes for the first time under theimmunity scheme have already come in the tax net and they will be required to have permanent accountnumbers. The objective of higher tax rates is to target these people by and large.