The tax, which would hit companies' annual sales, was put forward by Livingstone in an attempt to counter companies managing to avoid paying corporation tax, as shown by the growing outrage over the amounts of tax paid in the UK by multi-national firms like Amazon, Google and Starbucks.
The former London Mayor put forward the idea in a meeting of the Labour party's National Executive Committee, which was attended by Labour leader Ed Miliband and deputy Harriet Harman.
In a note of the meeting, Livingstone is reported saying that if companies "refused to pay" corporation tax, then "it should be replaced by a tax on turnover", adding that tackling tax avoidance and evasion would amount to 10% of GDP.
"His suggestions will be passed to Ed Balls," the report by Ann Black reads.
Tories leapt on Livingstone's suggestion, with party chairman Grant Shapps telling the Sun that the turnover tax would "knock confidence, meaning fewer jobs, and longer dole queues".
Robin Walker, Tory member of the business select committee, said: "We need to crack down on tax avoidance but there are much better ways of doing it and turnover tax would hit all businesses whether or not they try to avoid tax. It would discourage investment and penalise success."
Ed Balls' spokesman said that Livingstone's turnover tax proposal was not something the leadership was "looking at", adding that the party would instead "close down tax loopholes and cut business rates for small firms."