Can Employer take passport for work permit processing ?

Yes, This is a common practice in Africa.

Then what if they dont return it and exploit an employee

Your passport is the property of the country that issued the passport. It is illegal for any company to keep the passport once work permits and visas have been organised.
Companies often keep the passports so they can exploit the workers.

I would suggest that you keep a copy of your passport and if the company does not give the passport back after work permit and visas have been done, you then contact your Embassy and inform them of the problem.

Thanks for your reply. Do photocopies of passport suffice to get work permit? And is work permit any card given separately or a sticker like visa pasted inside passport pages. Does anyone knows

Look, photocopies are not accepted for issuing permits.
work permits are not stickers but stamps on pages of passports

There is no chance you can refuse to give your passport to your employer for a legitimate purpose. In fact your employer is helping you by offering employment. Don't begin your journey with suspicion. Beyond a point, unfortunate employers sometimes become helpless eventually some of their employees suffer.

It's not very common in Tanzania that employers keep employees' passports even though I have heard some friends talking about some companies doing it.

Keeping photo copies of your travel documents isn't going to be waste but useful in the long run

Like mentioned here, It is common practice in Africa to withheld the passport of the employee.Two reasons: One to exploit employees. Second precaution from untrustworthy employees. Mostly the first reason being most prevailing in Africa. You can always get a passport from embassy if you explain the situation.

For a permit application original passports are not necessary to be submitted with immigration while applying. Only when the real permit is out from the immigration, for endorsing the permit to a passport requires original passport which is mere stamping. So that you can travel in and out of the country.

At this point I shall agree with speaking-tom..... Do not begin by suspicion and always keep copies of your passport and permit .

Good luck!!