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