A Data-Driven Analysis of Fiscal Challenges and SME Formalization
Tanzania faces a structural fiscal paradox: despite the Tanzania Revenue Authority (TRA) consistently exceeding revenue collection targets—achieving 103.1% in FY2023/24 and 103.0% in FY2024/25—the country maintains a persistent budget deficit of 3.4% of GDP, translating to a TZS 1.68 trillion shortfall.
This paradox is not a revenue collection failure. Instead, it reflects a fundamental structural constraint: Tanzania's tax base is too narrow. With a tax-to-GDP ratio of just 12.9%—significantly below the Sub-Saharan Africa average of 16% and the minimum efficiency benchmark of 15%—Tanzania leaves substantial revenue potential untapped.
The root cause lies in the massive informal economy. An estimated 72% of small and medium enterprises (SMEs) operate informally, representing approximately 1.8 million businesses outside the formal tax system. These SMEs cite excessive tax burden (78% of respondents), complex compliance requirements, and punitive enforcement as primary reasons for remaining informal.
This report presents evidence-based solutions grounded in rigorous data analysis and regional best practices. The path forward is clear: expand the tax base, not the tax burden. By implementing tiered SME tax rates, launching the Integrated Digital Revenue Administration System (IDRAS), strengthening local government revenue systems, and fostering voluntary compliance, Tanzania can unlock TZS 8-11 trillion in additional annual revenue while formalizing 320,000-400,000 SMEs within five years.
Tanzania's fiscal challenge is not a failure of revenue collection. The TRA has demonstrated remarkable efficiency, consistently surpassing revenue targets over the past two fiscal years. In FY2023/24, TRA collected TZS 29.8 trillion against a target of TZS 28.9 trillion (103.1% achievement), and in FY2024/25, it collected TZS 32.26 trillion against a target of TZS 31.5 trillion (103.0% achievement). Even in January 2025 alone, TRA collected TZS 3.88 trillion against a target of TZS 3.57 trillion, representing an impressive 108.6% achievement.
| Period | Target | Actual Collection | Achievement |
|---|---|---|---|
| FY 2023/24 | TZS 28.9T | TZS 29.8T | 103.1% (+TZS 0.9T) |
| FY 2024/25 | TZS 31.5T | TZS 32.26T | 103.0% (+TZS 0.76T) |
| H1 2024/25 | TZS 14.87T | TZS 15.11T | 101.6% (+TZS 0.24T) |
| January 2025 | TZS 3.57T | TZS 3.88T | 108.6% (+TZS 0.31T) |
Source: TICGL analysis of TRA monthly and annual reports, 2024-2025
Yet despite this performance, Tanzania's budget deficit remains at 3.4% of GDP, translating to a TZS 1.68 trillion shortfall. The country has maintained an average deficit of 3.5% of GDP over the past five years, consistently above the 36-year historical average of 2.3% of GDP.
| Fiscal Year | Deficit (% GDP) | Revenue (TZS T) | Expenditure (TZS T) | Debt (% GDP) |
|---|---|---|---|---|
| 2020/21 | 3.5% | 22.5 | 25.8 | 43.6% |
| 2021/22 | 3.6% | 24.1 | 27.6 | 45.5% |
| 2022/23 | 3.5% | 26.3 | 29.9 | 45.9% |
| 2023/24 | 3.4% | 27.8 | 31.4 | 49.2% |
| 2024/25 | 3.4% | 28.1 | 30.2 | 47.3% |
| 2025/26 (Est.) | 3.4% | 31.8 | 35.4 | 49.4% |
Source: Ministry of Finance, Bank of Tanzania, IMF; Note: 36-year historical average deficit is 2.3% of GDP
The core structural issue lies in Tanzania's tax-to-GDP ratio of 12.9%, which falls significantly below critical benchmarks:
With nominal GDP estimated at TZS 275 trillion in 2026, each percentage point increase in the tax-to-GDP ratio represents TZS 2.75 trillion in additional revenue.
Potential additional annual revenue if Tanzania reaches 15-18% tax-to-GDP ratio
TICGL's comprehensive analysis identifies five interconnected structural forces that sustain Tanzania's persistent budget deficit. Understanding these drivers is essential for developing effective, sustainable fiscal solutions.
In FY2024/25, recurrent expenditure consumed 68.7% of the total budget (TZS 20.75 trillion), leaving only 31.3% for development spending. Within recurrent expenditure, two categories dominate:
This creates a structural fiscal constraint: nearly half of all revenue is absorbed by fixed obligations before any development projects can be funded. The government's ability to reduce these expenditures in the short term is extremely limited, as wage commitments are contractually binding and interest payments are non-negotiable debt obligations.
Tanzania's public debt reached TZS 125.5 trillion (47.3% of GDP) as of March 2025, remaining below the 50% constitutional limit but still representing a significant fiscal burden. The debt servicing implications are severe:
High domestic borrowing (60% of deficit financing) raises interest rates and crowds out private sector credit, potentially slowing economic growth and future tax revenues. This creates a vicious cycle where borrowing to cover deficits increases future debt servicing costs, further widening the deficit.
Perhaps the most striking structural weakness is the gap between economic activity in Local Government Authorities (LGAs) and their revenue collection capacity. In H1 FY2024/25:
| Entity | H1 Collection | Target Achievement |
|---|---|---|
| TRA (Central) | TZS 15.11 Trillion | 101.6% |
| 185 LGAs (Combined) | TZS 419.5 Billion | 61.5% |
Source: TICGL analysis of TRA and PO-RALG LGA revenue reports, H1 FY2024/25
This massive disparity forces the central government to fund both national and local functions through transfers of TZS 4.66 trillion, adding significant pressure to the national budget.
LGAs preside over agriculture (26.5% of GDP), wholesale and retail trade (18.2%), construction (13.2%), and vast informal sector activity, yet collect less than 5% of the potential revenue from these activities.
Tanzania's informal economy represents one of the largest structural barriers to tax base expansion in Sub-Saharan Africa. Estimated at 45-46% of GDP (approximately $193 billion at PPP levels), the informal sector employs 65-76% of the national workforce—roughly 21.5-25.2 million people—yet only 20% of potential tax revenue from these activities is captured, particularly at local government levels.
The informal sector's dominance creates a self-reinforcing cycle: low formalization shrinks the tax base, limiting government revenue for public investments that could encourage formalization. In Dar es Salaam alone, the informal sector contributes 22.5% of the city's GDP (TZS 6.2 trillion), but official statistics underestimate this contribution by TZS 2.3 trillion, indicating systematic undercounting and undertaxing of informal economic activity.
| Country | Informal Economy (% GDP) | Tax-to-GDP Ratio (%) | Employment in Informal Sector |
|---|---|---|---|
| Tanzania | 45-46% | 12.9% | 65-76% |
| Rwanda | 40% | 15.0-16.3% | 69% |
| Kenya | 34-36% | 17.3% | 83.4% |
| Uganda | 43% | 13.2% | 72% |
| Zimbabwe | 60.6% | 23.5% | 85% |
Source: World Bank, IMF, ILO Informal Economy Statistics; Tanzania informal economy valued at ~$193B PPP
The data reveals a clear inverse relationship: countries with larger informal sectors tend to have lower tax-to-GDP ratios. Tanzania's informal economy is second only to Zimbabwe in the region, yet Tanzania's tax collection performance significantly lags peers with smaller informal sectors.
Rwanda, with a 40% informal economy (5-6 percentage points smaller than Tanzania's), achieves a tax-to-GDP ratio 2.1-3.4 percentage points higher through better tax administration, simplified SME tax regimes, and stronger formalization incentives.
Formalizing even 15% of Tanzania's informal sector—bringing approximately 270,000 businesses into the tax net—could boost revenues by TZS 3-5 trillion annually, based on comparative reforms in Rwanda and Kenya where simplified tax regimes reduced evasion by 30-60%.
The key is not aggressive enforcement of current tax rates, but fundamental reform that makes formalization economically viable for small businesses.
Small and Medium Enterprises constitute 95% of all businesses in Tanzania, employ 5-6 million people (35% of the workforce), and contribute approximately 35% of GDP. Yet 72% operate outside the formal tax system—not because of non-compliance culture, but as a rational economic response to a tax system that imposes costs businesses cannot absorb.
TICGL's comprehensive survey of 250 SMEs across five regions (Dar es Salaam, Arusha, Mwanza, Mbeya, Dodoma) reveals six critical barriers that systematically prevent SME formalization and limit tax base expansion:
Tanzania's 30% corporate income tax rate is among the highest in East Africa and becomes prohibitive when combined with other obligations. A typical retail SME with TZS 150 million annual revenue faces a combined tax burden exceeding 21% of revenue:
| Tax/Levy Type | Annual Amount | USD Equivalent | % Revenue |
|---|---|---|---|
| Corporate Income Tax (30%) | TZS 20.0M | ~$8,000 | 13.3% |
| VAT Obligations (net) | TZS 5.0M | ~$2,000 | 3.3% |
| Business Permits & Levies | TZS 3.0M | ~$1,200 | 2.0% |
| SDL (4% of payroll) | TZS 2.4M | ~$960 | 1.6% |
| Tax Consultant Fees | TZS 1.5M | ~$600 | 1.0% |
| TOTAL TAX BURDEN | TZS 31.9M | ~$12,760 | 21.3% |
Source: TICGL SME case study research, 2025
Impact on Business Viability: TICGL's survey found that 68% of SMEs report that high tax rates negatively impact profitability to the extent that reinvestment becomes impossible. A business paying 21.3% of revenue in taxes and compliance costs has minimal margin for equipment upgrades, workforce expansion, or capital accumulation—the very investments needed for growth.
The average SME spends 248+ hours annually on tax compliance—filing separate returns for VAT, corporate income tax, and payroll taxes, each with different deadlines and penalties. This administrative burden translates to direct costs:
Real-World Example: For an agribusiness in Mwanza generating TZS 80 million annually, spending TZS 4.5 million on tax compliance (5.6% of revenue) represents a significant drain on net profit. Many SMEs in rural areas lack internet access to use TRA's Online Tax System, have no trained accountants, and receive no taxpayer education—making compliance structurally impossible regardless of willingness.
Tanzania's VAT registration threshold of TZS 100 million creates a formalization cliff: businesses that cross this threshold face immediate compliance costs (monthly VAT filings, certified accounting systems, penalties for late submission) without corresponding benefits. This creates perverse incentives:
TICGL's analysis of regional best practices and Tanzania's specific context identifies four evidence-based reform strategies that can sustainably expand the tax base while promoting economic growth:
The most effective strategy for tax base expansion is implementing a tiered SME tax system that reduces rates for small businesses while maintaining higher rates for larger enterprises. This approach has proven successful across East Africa:
| Country | SME Tax Rate | Key Incentives | Formalization | GDP Impact |
|---|---|---|---|---|
| Tanzania | 30% | Very limited | <20% | 35% of GDP |
| Rwanda | 3% flat | Tiered: 0-3% | 60%+ | High growth |
| Kenya | 1-3% | Simplified regime | 30%+ | Strong SME |
| Mauritius | 0% (5yrs) | Tax holidays | High | 50%+ of GDP |
Source: TICGL comparative analysis of East African tax regimes
The Integrated Digital Revenue Administration System (IDRAS), announced by TRA in January 2026, represents a transformative opportunity to reduce compliance burden and expand the tax base through technology. Key components:
Real-time links between TRA, banks, BRELA, and mobile money platforms to track economic activity and pre-fill tax returns, reducing compliance burden by 60-70%.
USSD and smartphone apps enabling SMEs to file returns in under 10 minutes, eliminating the need for external consultants and making compliance accessible in rural areas.
AI-powered analytics to identify high-risk cases while reducing harassment of compliant taxpayers, creating a fairer enforcement environment.
Integration with M-Pesa, Tigo Pesa, Airtel Money, and banks for instant tax payments, removing payment barriers and improving cash flow management.
Projected Impact: Countries that have implemented similar digital tax systems (Kenya's iTax, Rwanda's e-Filing) have seen:
Addressing the TZS 15.11 trillion (TRA) vs TZS 419.5 billion (LGAs) collection gap requires fundamental reform of local government revenue systems:
With agriculture (26.5% of GDP), trade (18.2%), and construction (13.2%) concentrated in LGA jurisdictions, properly administered local taxes could generate:
Additional annual revenue, reducing central government transfer obligations and creating fiscal space
Recognizing that 60% of SMEs have inadequate tax knowledge, comprehensive taxpayer education is essential:
TICGL's comprehensive modeling, based on Tanzania's economic structure and comparative regional reforms, projects substantial revenue gains from implementing the recommended tax base expansion strategies:
| Reform Area | Annual Revenue Gain | Formalization Impact | Implementation Timeline |
|---|---|---|---|
| SME tiered tax rates (10-18%) | +TZS 8-12T | 360K-540K businesses | FY2026/27 |
| IDRAS digital infrastructure | +TZS 5-7T | Reduced evasion | 2026 (ongoing) |
| LGA revenue strengthening | +TZS 2-3T | +30% LGA collection | FY2026/27-27/28 |
| Tax education & voluntary compliance | +TZS 3-5T | Reduced unintentional non-compliance | FY2026/27 (ongoing) |
| Reduced transfer obligations | +TZS 1.5-2T | Fiscal space created | FY2027/28 |
| TOTAL PROJECTED IMPACT | +TZS 19.5-29T | 20-30% formalization | 3-year horizon |
Source: TICGL economic modeling based on regional reform outcomes and Tanzania-specific factors
Implementing these reforms would:
These projections assume:
Even with these conservative assumptions, the fiscal impact is transformational.
Tanzania's fiscal challenge is clear: despite impressive TRA revenue collection performance (103%+ achievement rates), the country maintains a persistent 3.4% budget deficit because the tax base is fundamentally too narrow. With 72% of SMEs operating informally and the tax-to-GDP ratio at just 12.9%, substantial revenue potential remains untapped.
The solution is not higher tax rates. Tanzania's 30% corporate income tax rate already ranks among East Africa's highest, and SMEs report that current tax burdens make formalization economically unviable. Increasing rates would drive more businesses underground, shrinking the tax base further.
The solution is tax base expansion through intelligent reform:
Implement tiered SME tax rates (10-18%) that reduce the burden on small businesses while maintaining higher rates for larger enterprises. This approach has proven successful in Rwanda, Kenya, and Mauritius.
Deploy IDRAS digital infrastructure to cut compliance time by 60-70%, enabling SMEs to file taxes in under 10 minutes via mobile phone instead of spending 248+ hours annually.
Address the TZS 15.11T (TRA) vs TZS 419.5B (LGAs) collection gap through digitization, property tax reform, and capacity building, generating TZS 2-3T in additional revenue.
Recognize that 60% of SMEs lack tax knowledge. Implement comprehensive taxpayer education, free tax clinics, and penalty amnesty programs to foster cooperation over fear.
The fiscal mathematics are compelling: these reforms can generate TZS 19.5-29 trillion in additional annual revenue within 3-5 years, increase the tax-to-GDP ratio from 12.9% to 15.2-16.5%, eliminate the structural budget deficit, and formalize 320,000-400,000 SMEs. This would create TZS 8-11 trillion in new fiscal space for development spending while reducing reliance on debt financing.
Tanzania stands at a fiscal crossroads. The country can continue pursuing incremental revenue gains through higher rates and aggressive enforcement, further shrinking the tax base and constraining growth. Or it can implement fundamental reform that expands the tax base by making formalization economically viable and administratively feasible for the 1.8 million businesses currently operating informally.
Expand the tax base through intelligent, evidence-based reform.
Make formalization affordable and administratively simple.
Build voluntary compliance through education and support.
Transform Tanzania's fiscal future.
Research and Analysis by
Tanzania Investment and Consultant Group Ltd (TICGL)
Economic Research Division | February 2026