Dissertation Submitted to Mzumbe University, in Partial Fulfillment of the Requirements for the Award of the Degree of Master of Business Administration in Corporate Management (MBA-CM) of Mzumbe University.This study explores challenges facing tax collection from informal sector in Tanzania. Specifically, the study aims to achieve the following objectives; to establish the factors influencing willingness of informal enterprises to pay taxes, to establish the factors hindering procedural tax obligations and to establish alternative mechanisms for improving tax collection. The study involved a total number of 98 respondents from 4 Blocks in Mwanza City Council, of whom 88 were small and medium taxpayers. Other respondents were 3 tax consultants, 6 tax officials and 1 Regional Manager from Domestic Revenue Department (DRD) Mwanza Tax Region. The study used non probability sampling where purposive and convenient sampling techniques were used to obtain the above mentioned respondents from total population. Questionnaires were used as the main tool of collecting data. Findings of this study reveal that willingness of small and medium taxpayers to pay tax depend on the tax morale, low transaction costs, a functioning tax administration and capacity in auditing and monitoring tax payments from the small and medium taxpayers. It was also revealed that rampant tax evasion by the small and medium taxpayers is the result of lack of cordial methods of tax collection. The study also reveals the importance of establishing an alternative mechanism to improve tax collection from the small and medium taxpayers including the use of Public Private Partnership (PPP), rationalizing tax rate and designing unique tax structure for informal sector. Lastly, the study recommends that there is a need to have the sector specifics strategy of tax collection that will enhance tax collection from the informal sector so as to minimize gap between the available tax revenue potential against the actual taxes collected.