In the labyrinthine aisles of Kariakoo Market, one of East Africa’s largest commercial hubs, Amina Hussein sorts through crates of imported textiles, her daily ledger balancing precariously between survival and state scrutiny. Like millions of other small-scale entrepreneurs across Tanzania and the broader East African Community, Hussein operates in an environment where tax compliance is often viewed not as a civic duty, but as a bureaucratic obstacle course designed to stifle growth rather than foster it.

As governments across the region aggressively seek to widen their fiscal nets to fund ambitious national development agendas, the friction between tax authorities and the informal economy has reached a breaking point. With a recent presidential commission in Tanzania unveiling 284 sweeping proposals to overhaul the national tax architecture, the region is bracing for a fundamental shift. At stake is not merely the efficiency of government revenue collection, but the economic viability of the informal sector—which, by conservative estimates, accounts for over 70 percent of employment across the region and serves as the primary engine for millions of households.

The Invisible Engine of the Economy

The scale of the informal economy in East Africa is vast, often operating just beyond the reach of formal regulatory and tax frameworks. Recent data suggests that in Tanzania, roughly 72 percent of small and medium enterprises (SMEs) operate informally, representing approximately 1.8 million businesses. This sector is responsible for an overwhelming majority of new job creation, yet it remains largely untouched by conventional corporate tax structures.

Economists and policymakers alike recognize the paradox: while governments are desperate to boost tax-to-GDP ratios—often languishing well below the 20 percent efficiency benchmarks set by international development plans—the current regulatory environment frequently penalizes the very actors they aim to formalize. The challenge is starkly illustrated by the following dynamics:

• High Informality Rates: Approximately 85 percent of the working-age population in Sub-Saharan Africa is engaged in informal employment, leaving a narrow tax base that places an unsustainable burden on formal entities.
• Regulatory Complexity: Small businesses consistently cite multiple, overlapping levies, punitive registration fees, and opaque compliance requirements as the primary deterrents to formalization.
• Fiscal Gaps: Despite revenue collection targets often being met by authorities like the Tanzania Revenue Authority (TRA), national budget deficits persist—frequently exceeding 3 percent of GDP—because the tax base itself is too narrow.

The Regulatory Stranglehold

The core of the problem lies in the disconnect between the design of tax systems and the reality of small-scale business. For decades, the approach has been to treat informal traders as tax evaders to be corralled, rather than economic participants to be enabled. This punitive philosophy has fostered a culture of fear, where business owners actively avoid registration to escape the cascading costs of compliance.

Professor Haroon Bhorat, a prominent economist focused on African labor markets, notes that the current growth patterns in the region are not translating into sufficient formal jobs. Instead, the surplus of labor is absorbed by low-productivity, informal roles. When governments attempt to force formalization through blunt instruments—such as mandatory electronic tax registers or aggressive enforcement of licensing fees—they often push businesses further into the shadows, causing a retreat from digital platforms back to cash-based, untraceable transactions.

Digital Transformation or Digital Divide?

The push for modernization is real. Across the East African Community, revenue authorities are racing to digitize their operations. Kenya has been a pioneer in enforcing electronic tax invoices, a model that Tanzania and other neighbors are closely observing. However, experts warn that digital tools are not a panacea. If implemented without accompanying structural simplification, e-invoicing can create a "compliance wall" that small enterprises cannot climb.

The presidential commission in Dar es Salaam has rightly identified this hurdle. Their recommendations include the introduction of a national tax policy and a comprehensive taxation act designed to restore predictability. The goal is to move away from ad-hoc, sectoral levies toward a streamlined system where business registration is simplified and tax obligations are tiered. This, proponents argue, is the only way to convert the informal "survival" economy into a formal "growth" economy.

The Human Cost of Inaction

For individuals like Hussein, the promise of reform feels distant. She currently navigates a system where she must account to multiple local and national authorities, often paying various fees that cumulatively erode her profit margins. A 2026 report indicates that over 70 percent of SME owners rank tax compliance as their single greatest business challenge, often surpassing the difficulty of accessing credit or finding raw materials.

If the proposed reforms are to succeed, they must prioritize the "ease of doing business" over the immediate maximization of revenue. Expanding the tax base requires building trust. When businesses perceive that their tax contributions are directly funding the infrastructure, electricity, and security they require to operate, voluntary compliance increases. Conversely, when taxes are perceived as predatory, the incentives for evasion only grow stronger.

The path forward for East Africa’s economic giants—Kenya, Tanzania, and their neighbors—is increasingly clear: fiscal sustainability cannot be achieved through higher rates on a shrinking pool of formal taxpayers. It must be built upon a foundation that brings the millions of informal workers into the fold not through force, but through a system that makes being legitimate more profitable than remaining in the shadows. Whether the political will exists to dismantle these regulatory walls remains the defining question for the region’s economic trajectory over the next decade.