Formalising Tanzania’s Informal Sector: Part 2

TANZANIA’S informal sector has emerged as a cornerstone of the national economy, contributing more than 50 per cent of the country’s GDP and employing over 80 per cent of its workforce, according to the International Labour Organisation’s 2022 data.

Financial expert Brianna Johnson from Ruislip, West London, highlights the dynamic nature of the informal sector, stating,

“This sector is marked by its fluidity, resilience, and an inherent capacity to alleviate poverty, yet many informal enterprises remain outside the formal tax system.”

She further explains that this exclusion is not necessarily the result of deliberate tax evasion but rather stems from complex bureaucratic procedures, financial constraints, and a pervasive fear of punitive taxation.

Through this article, we aim to address these challenges by presenting a comprehensive tax reform strategy that is rooted in expert analysis and robust metrics.

Our goal is to provide the tax reform commission with valuable insights into public perceptions regarding the integration of Tanzania’s informal sector into the formal economy, ultimately fostering a more inclusive and sustainable financial framework.

Tax landscape Tax expert Yasmine Yassine from Algeria, currently on holiday in Karatu District, Arusha Region describes Tanzania’s taxation framework as outdated and inconsistent, making it illsuited for the informal sector.

She explains that while the Finance Act of 2020 aimed to simplify tax registration, its impact has been limited, leaving many businesses outside the formal system.

Ms Yassine assessment is further reinforced by Mr Hussein Kilokoza, a financial consultant based in Babati District, Manyara Region, who cites KPMG and PwC’s 2020 reports, which reveal that despite recent tax reforms, a significant portion of businesses remain unregistered.

The findings indicate that the Finance Act has not effectively addressed the structural barriers preventing informal enterprises from formalising, further validating Ms Yassine’s argument that Tanzania’s current taxation framework fails to align with the practical realities faced by small businesses operating outside the formal economy.

Building on the above, an analysis of available data suggests that only 20-30 per cent of informal enterprises are registered, with 25 per cent being a reasonable estimate.

The World Bank’s 2023 Informal Sector Enterprise Survey documented 2,433 informal businesses in select areas of Dar es Salaam, highlighting the sector’s scale. Given that urban areas generally have higher registration rates than rural ones, the national percentage is likely lower.

This suggests that 3.5 to 4.0 million informal businesses remain unregistered, reinforcing the need for tax reforms that simplify registration, improve financial access, and build trust.

Formalisation could expand the tax base and provide businesses with financial support and government incentives.

Tax consultant Brian Macha from the Dodoma adds that informal operators, including street vendors and motorcycle taxi drivers, frequently relocate, making it difficult for tax authorities to track income and enforce compliance.

The current tax model fails to accommodate the sector’s fluctuating cash flows, further alienating informal businesses.

A more adaptive and inclusive taxation approach is essential for fostering sustainable economic integration.

Barriers to tax compliance Brian Macha further explains that daily cash flow dependence and lack of access to financial services make tax remittance challenging for informal business owners.

Many fear that formalisation will expose them to unpredictable tax burdens, threatening their already limited profits.

Additionally, mistrust of tax authorities due to harassment, arbitrary taxation, and inconsistent enforcement discourages compliance.

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Reports indicate that 25 per cent of urban informal traders in the top five economies in Africa that build-up 50 per cent of Africa’s GDP of 2.4 trillion US dollars have faced tax-related harassment, reinforcing resistance to registration. Mr Brian concludes that without financial education, better banking access, and a transparent tax structure, informal businesses will remain reluctant to formalise.

A supportive, predictable system is essential to encourage compliance. Economist Musa Musa, based in the Southern Highlands, explains that fear of excessive taxation is a major deterrent for informal entrepreneurs, who worry that formalisation will subject them to multiple tax burdens and harsh penalties, severely impacting their slim profit margins.

Research from the Financial Sector Deepening Trust Tanzania highlights that many, particularly women, face harassment, verbal abuse, and coercion from local authorities, with reports of extortion and exploitation further discouraging compliance.

A 2018 study by Ilona Steiler, published in Articulo – Journal of Urban Research, examines the risks faced by street traders in Dar es Salaam due to their high visibility. Titled: “What’s in a Word? The Conceptual Politics of ‘Informal’ Street Trade in Dar es Salaam” the study reveals that traders are frequently subjected to severe fines, physical abuse, and even criminal prosecution, with penalties of up to six months in prison. While visibility helps attract customers, it also makes them targets for enforcement actions.

These challenges fuel mistrust toward tax authorities, discouraging voluntary compliance and widening the gap between the informal and formal economy. Addressing these systemic barriers is critical to any effective tax reform.

Simplifying registration process A fundamental reform to enhance tax compliance is simplifying the business registration process, which remains a major barrier for entrepreneurs.

According to a researcher John Marwa, based in Geita Region, Tanzania’s ranking of 141st out of 190 economies in the World Bank’s Doing Business 2020 report reflects significant bureaucratic obstacles that hinder business formalisation.

This ranking underscores the complexity of regulatory procedures, which discourage many informal businesses from transitioning into the formal economy. Although the World Bank discontinued the Ease of Doing Business Index in 2021, Marwa emphasizes that Tanzania’s previous ranking highlights the urgent need for streamlined, accessible, and transparent registration processes to foster entrepreneurial growth and encourage tax compliance.

Caleb Abraham, a retired economist based in Kilifi County – Kenya, proposes that a streamlined registration system should include a single-tier tax regime based on income levels, making it easier for informal businesses to transition into the formal economy.

He says that integrating mobile registration and payment systems would significantly reduce bureaucratic hurdles, minimise paperwork, and curb corruption, creating a more efficient and transparent tax framework.

Establishing dedicated tax registration centres at the local government level would provide direct, personalised assistance to traders, helping to simplify the process and highlight the long-term benefits of formalisation.

A professor from the Makerere University School of Economics (MakSOE) emphasises that streamlining tax registration is more than just an administrative enhancement—it is a powerful tool for economic empowerment.

“With a user-friendly system, Tanzania could realistically achieve a 40-50 per cent increase in formal business registrations within the next five to seven years, provided there is consistent policy enforcement and ongoing support,” he said.

To put this into perspective, the academician illustrates that with 1.3 million businesses currently registered, a 50 per cent increase would push the number to approximately 1.95 million, significantly expanding the tax base and boosting national revenue.

Phased taxation strategy Analysts across Tanzania advocate for a phased approach to taxation, viewing it as a pragmatic and less intimidating pathway for informal businesses transitioning into the formal sector.

Ramadhani Kaniki from Manyara said that instead of imposing full tax obligations immediately, a gradual introduction of tax liabilities would give micro-enterprises the financial flexibility needed to stabilise and grow.

Supporting this perspective, Joyce Mangi from Arusha Region suggests a tiered taxation model, where micro-businesses earning below 7.0m/- annually receive a three-year tax holiday, allowing them to establish themselves before tax obligations begin.

Meanwhile, businesses generating above 7.0m/- and not more than 20m/- could benefit from reduced tax rates during the transition period, easing their financial burden while encouraging formalisation.

Regional economic analyst from Rwanda emphasises that phased taxation can help businesses stabilise financially, encouraging formalisation.

While no specific figures confirm its direct impact in Rwanda, tax reforms have significantly improved compliance, with the taxto-GDP ratio doubling from under 8.0 per cent in the 1990’s to over 16 per cent by 2020 accordance to the IMF report of 2023.

Additionally, integrating tax registration with business licensing has reduced bureaucratic hurdles with reference to the then Ministry of Finance and Planning report of 2023. Applying this to Tanzania, a phased tax model could increase business registrations by 20-28 per cent over two years, raising current registrations from 1.3 million to 1.56–1.66 million.

This growth could boost tax revenues by 15-20 per cent, assuming new businesses contribute proportionally. While success depends on enforcement and business response, Rwanda’s reforms suggest that gradual taxation and simplified registration can drive formalisation and revenue growth in Tanzania.

Afterword To conclude, Tanzania’s informal sector remains a vital pillar of economic activity, yet its full integration into the national fiscal framework requires a strategic, phased, and inclusive tax reform approach.

Grounded in expert insights and data-driven solutions, such reforms have the potential to increase tax compliance, expand government revenue, and create an enabling environment where small businesses can thrive sustainably.

A well-structured approach will not only bridge the gap between informal entrepreneurs and the formal economy but also foster longterm economic stability.

As a continuation of these discussions, our next article will serve as a follow-up to this series, offering final expert recommendations on actionable reforms for integrating the informal sector.

This concluding piece will feature case studies that illustrate real-world successes, providing deeper insights into effective policies and their impact on Tanzania’s economy and the broader East African region.

By building on the insights presented here, we aim to contribute to a more practical and informed dialogue on sustainable economic inclusion and tax policy reform.

● We want to hear from you!

Share your thoughts and experiences on how Tanzania’s tax system should be reformed by reaching out to us at 0655963224 or emailing kelvinmsangi@ protonmail.com

Your input is invaluable in shaping policies that are fair, efficient, and supporting the work done by the Tax Reform Commission.Let’s work together to create a tax environment that empowers small businesses and drives economic progress for all Tanzanians. Join the conversation today!