Scottish Government plans to replace the council tax with a local income tax would result in a "bureaucratic nightmare" that would turn businesses away from Scotland and increase the tax burden north of the border, according to Labour.

The claims come after Finance Secretary John Swinney confirmed that the SNP would consider allowing Scotland's 32 councils to set the rate locally, which has been a key Lib Dem demand throughout negotiations between the two parties.

Under the revised plans – which opposition politicians have attacked as a major U-turn – rates would be variable by up to 3p locally. The new proposals also include the possibility of taxing "unearned" income from shares, a move welcomed by Liberal Democrat finance spokesman Jeremy Purvis.

However, business groups and the Labour Party have expressed considerable discontent over the moves, with finance spokesperson Andy Kerr yesterday decrying the "bureaucratic nightmare for both business and employees" that he believes would follow from allowing "32 rates of tax".

"The nationalists' local income tax plans are in complete disarray. Both the policy and the uncertainty around the policy is damaging confidence in Scotland, as CBI Scotland has made clear. The Scottish Government should drop the LIT immediately," he added.

Labour's leader in the Scottish Parliament, Iain Gray, said: "A local income tax would be bad for hard-working families who would have to pay more, such as a couple like a fireman and a nurse.

"It would be bad for local services facing cuts of around £1 billion and bad for the economy, turning Scotland into the highest taxed part of the UK. That's why the CBI is reiterating its call for Alex Salmond to dump the local income tax."

Kerr added: "Just now, the Scottish Government should be doing everything it can to protect jobs. Instead, it looks like the SNP and the Liberal Democrats are teaming up to drive business out of Scotland."

The possible move on taxing investment income was only revealed after a freedom of information request was lodged by the BBC. At this stage Swinney insists it is being considered as "an option" following the public consultation.