ABSTRACT This work was intended to analyze tax incentives and exemptions provided to Foreign Direct Investors as a major challenge to the Tanzanian economy. Tax exemption in Tanzania has been recognised as an incentive for Foreign Direct Investment (FDI), and used as a tool for influencing investors to come and invest in Tanzania. Therefore, the basic question is that, what are the impacts of these tax incentives and exemptions given to Foreign Direct Investors to the Tanzanian economy? The next section is based on the Foreign Direct Investment in Tanzania. This chapter enshrines the meaning of FDI, and briefly outlines the historic background of FDI inflow in Tanzania, as well as conditions to be observed for FDI to invest in Tanzania. It also indicates the incentives given to Foreign Direct Investors in Tanzania. The third section discusses tax incentives and exemptions to FDIs in Tanzania. The section contains the meaning of the tax incentives and exemptions, and how Foreign Direct Investors are given tax incentives in Tanzania. The advantages and disadvantages for Tax incentives to the Tanzanian economy are also dealt. The findings of the study revealed that, tax incentives and exemptions involve a large sum of money which reduces revenue to the treasury negatively affecting the national economy. Hence, they are losses to the government of Tanzania which also is contributed by the managerial failures to handle FDIs. It can be concluded that, it is important to have tax incentives and exemptions in order to attract more DIs though there is a need to cure the challenges emerging in the course of this relation in connection to improving management on the matter. To recommend, the government should amend all the status providing for investment matters focusing on the reduction of the tax incentives and exemptions concerned.