This study assesses the impact of contract farming on farm productivity and returns in tobacco farming. The study was conducted in Uyui district, Tabora region Tanzania. Specifically, the study investigates the profitability of tobacco production under contract farming arrangement vis-à-vis tobacco production before the arrangement, analyzes problems affecting tobacco productivity among smallholder farmers and determines farmers’ perception about contract farming. A cross sectional survey was conducted on randomly selected 180 tobacco farmers from 18 villages. A pre-tested questionnaire was used to capture both qualitative and quantitative data on smallholder tobacco production and marketing under contract farming arrangement. The data obtained were used to describe structural and socio-economic factors that influence tobacco production. Gross margin analysis results reveal that tobacco production under contract farming is more profitable than before the arrangement. Regression analysis results showed a significant positive relationship between the independent variables considered to influence productivity. Variables included in the equation were farmer’s education level; farmer’s experience in tobacco farming, number of visits by the extension agents, amount of fertilizer per hectare and hired labour per hectare. The hired labour variable showed a positive relationship with yield but not significant. The study also reveals that the majority ( 78%) of the respondents do not favour contract terms and conditions, therefore, perceive contract farming as disadvantageous. To improve tobacco productivity and farmers’ income, the study suggests that, growers should initiate arrangement that would ensure self-reliance on production inputs particularly fertilizer. The study also recommends for the provision of quality and appropriate extension services, growers to look into the possibility of acquiring some shares in tobacco processing factories, the need for the government to consider increasing the subsidy on transportation and fertilizer costs; and the need for stakehoders to increase efforts on raising farmers’ awareness on the free market economy.