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 income exceeding Rs 2.5 lakh.

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

The step, it was pointed out, would not undo the rationalisation of direct tax structure and rates which theformer finance minister P Chidambaram tried to achieve by sharply reducing the income tax rates in the last budget. However, on the other hand, the move would make the income tax structure more in tune with the realities in the country by adhering to the cannons of taxation. The logic is that those who earn have more capacity to contribute to the exchequer.

The sources pointed out that Chidambaram's decision to drastically reduce income tax rates from 15, 30 and 40 per cent for different income slabs to 10, 20 and 30 per cent did not yield the expected revenue because the focus continued to be the fixed salary earners. The broadening of taxes and introduction of the Permanent Account Number also did not help the 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 the collections as per the revised estimates worked out to Rs 18,700 crore. More importantly, at the existing rates and slabs of income tax, thegovernment is estimated to collect only Rs 20,930 which would be less than last year's estimate.

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

This, sources, said would be done by consolidating the gains made from the successful implementation of the VDIS.

Although the 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 exchequer. Although the government is committed not to reopen the VDIS cases, the fact is declarants do not get any immunity from paying taxes in future. A host of those who have paid taxes for the first time under the immunity scheme have already come in the tax net and will be required to have PAN.