The presumptive tax system is Tanzania's simplified taxation regime for small businesses — designed to reduce the compliance burden for traders who would otherwise struggle with full income tax bookkeeping requirements. Instead of calculating taxable profit, eligible businesses pay a fixed percentage of their annual turnover.

In the FY2026/27 Budget, the government made two changes to this regime:

1. The Rate Increase

The presumptive tax rate for businesses with turnover between TZS 11 million and TZS 200 million has risen from 3.5% to 4.5% of turnover. In percentage-point terms this looks modest — just one point. But measured as a change in the effective tax burden, it represents a 28.6% increase in what these businesses must pay.

2. The Threshold Expansion

The turnover ceiling for eligibility under the presumptive regime has been raised from TZS 100 million to TZS 200 million — aligning it with the VAT registration threshold. This brings a new tier of medium-small businesses, previously required to file under the full income tax system, into the simplified presumptive regime.

Together, these two measures are projected to generate TZS 186.24 billion in combined additional revenue — TZS 75.11 billion from the rate increase and TZS 111.13 billion from the threshold expansion.

The Case That It Could Worsen Informality

Tanzania's informal sector is already estimated to account for roughly 70% of total economic activity — one of the highest shares in East Africa. For a trader operating near the margin, the calculation is simple: registering formally now costs more, while operating informally costs nothing in direct tax.

When the cost of formality rises faster than the visible benefits of formality — access to credit, government tenders, legal protection, market access — some businesses will respond not by paying more, but by under-declaring turnover, deregistering, or never registering at all. This is a well-documented response pattern across developing economies when presumptive rates rise without a parallel increase in the perceived value of formalization.

For a business operating in an already fragile economic environment — rising fuel costs, currency pressure, slow consumer demand — a 28.6% increase in a fixed cost (tax owed regardless of actual profit) adds to a growing list of reasons to stay invisible to the tax authority.

The Case That the Threshold Expansion Helps

The doubling of the threshold to TZS 200 million is, in isolation, a positive step. It moves a tier of medium-small businesses out of the complex full income tax system — with its detailed bookkeeping, audit exposure, and compliance costs — and into a simpler, more predictable regime. For businesses in the TZS 100–200 million range, presumptive taxation at 4.5% may still be cheaper and simpler than full income tax compliance, even at the higher rate.

Additionally, the one-year tax holiday for new businesses entering the presumptive regime is a genuine incentive for first-time formalization — though it does nothing for businesses already operating formally and now facing a higher bill.

Why the Net Effect Is Genuinely Uncertain

The honest answer is that this reform pulls in two directions simultaneously:

• For newly-eligible businesses (TZS 100–200M turnover): the move into presumptive taxation is likely a net relief compared to full income tax, even at 4.5%.
• For existing presumptive taxpayers (TZS 11–100M turnover): the rate increase is a straightforward cost increase with no offsetting benefit — these businesses gain nothing new, they simply pay more.
• For unregistered or borderline informal operators: the higher rate raises the perceived cost of entering the formal system at precisely the moment the government wants to attract them in.

This is the structural tension TICGL highlighted in its broader budget analysis: Tanzania's tax-to-GDP ratio remains low not primarily because rates are too low, but because the formal tax base is too narrow. Raising rates on those already inside the net does not address that narrowness — and risks making it worse if it discourages new entrants or pushes marginal existing taxpayers out.

What Would Make This Reform Work

The threshold expansion is the right instrument. The rate increase, applied uniformly, may undercut it. A more calibrated approach — for example, a lower rate for newly-registering businesses during a transition period, alongside visible improvements in what formal registration delivers (faster TIN processing, access to digital lending products tied to tax compliance history, simplified renewal procedures) — would align incentives rather than work against them.