The finance ministry is considering a proposal akin to a tax amnesty scheme to raise long-term funds for the infrastructure sector.

It has already held preliminary meetings with financial institutions to discuss the structure of the scheme.

According to high-level government sources, the scheme's target audience would be self-employed individuals holding unaccounted wealth.

The finance ministry hopes to mop up a significant amount by allowing financial institutions to issue bonds for investment in core sectors.

Sources said the government would charge a tax evasion penalty of about 10 per cent of the amount disclosed by individuals, with the balance being invested in long-tenure infrastructure bonds.

The bonds could offer an interest rate of 6 per cent a year with a tenure of 10 years or more, they said.

Finance and Company Affairs Minister Jaswant Singh has in various forums highlighted inadequate infrastructure as one of the factors that continue to hinder economic growth.

Addressing the Indian disapora on January 10, he stressed that greater investment in sectors like roads, ports, railways, and communications was a must.

Singh further said the government had to consider ways to raise funds to provide quality infrastructure services.

In fact, the National Council of Applied Economic Research in its December 2002 issue of MacroTrack, has advocated a scheme which "will not require disclosure of any other income" to induce greater long-term savings.

It said the self-employed could be provided with bonds or bank deposits that will attract a certain rate of tax and at the same time provide long-term returns.

The NCAER has pointed out that for the self-employed, hesitation on making investments in such instruments may well be the fear of getting caught in the tax net.

A non-disclosure of income scheme could prompt them to make long-term investments and enjoy retirement benefits while paying some taxes simultaneously.

For the government, the attractiveness of the scheme is in its ability to tap the "missing middle" in the tax net.

The politically sensitive scheme is, however, attractive to the tax administration which at present has little ability to tap this segment, sources said.

The Centre had in 1997 announced a Voluntary Disclosure of Income Scheme and mopped up about Rs 10,000 crore (Rs 100 billion). Despite its success, it attracted flak from political parties.

Not only did it penalise honest taxpayers, it also encouraged people to conceal incomes since they could get away lightly later, critics said.

The applicable rate of tax for the scheme was 30 per cent, which was the highest marginal rate of income tax in that year.

But whereas VDIS allowed individuals to retain their income after paying the tax, the present scheme will entail putting the entire sum in either tax or bonds.