One of the challenges facing most developing countries including Tanzania and Uganda is the presence of a fast-growing informal sector. The informal sector is characterised by limited documentation of business transactions and minimal or a total lack of tax payments which is premised in four main considerations. First, its contribution to the economy (39.5%) in Tanzania (TRA, 2011); 43.1% in Uganda (PSFU, 2009). Second, is the need to collect revenue to increase the tax to GDP ratio which in both Tanzania and Uganda is below the Sub-Saharan Africa average of 18–20%. Third, to encourage accountability by the state to a large population who pays taxes, which is known as the incentive system. Finally, to ensure equity by ensuring that it contributes revenue to the economy.

The paper focuses on Tanzania and Uganda, which have the history of colonial administration by Britain and are members of the East African Community (EAC). It also examines the importance of political settlement relative to the notion of political settlement and revenue bargains. The research questions are:

1. What is the importance and most effective ways of taxing the informal sector?
2. Who are the main actors and their main contribution in the bargaining process related to the taxation of the informal sector?

The paper reviews relevant literature on political settlement and revenue bargains relative to the taxation of the informal sector, particularly in relation to political settlement. It also reviews relevant policy documents and legislation from the perspective of its implementation. Interviews and Focus Group Discussions (FGDs) among government officials and trading groups, particularly the machinga in Tanzania and KACITA in Uganda, are employed in order to obtain primary information.