A perceptually scalable audio coder generates a bit-stream that contains layers of audio fidelity and is encoded in such a way that adding one of these layers enhances the reconstructed audio by an amount that is just noticeable by the listener. Such algorithms have applications like music on demand at variable levels of fidelity for 3G and 4G cellular radio systems operating at different bit rates. While the MPEG-4 natural audio coder can create scalable bit streams, its perceptual quality at low bit rates is poor. On the other hand, the non scalable TWIN-VQ performs well at low bit rates. In this paper we present a technique to modify the TWIN-VQ algorithm such that it generates a perceptually scalable bit-stream with layers of audio fidelity. Using the TWIN-VQ as our base ensures the best possible perceptual quality at low bit rates (8 - 16 kbps).