Growing evidence shows that diabetic kidney disease (DKD) is linked with intestinal dysbiosis from gut-derived toxins. Tangshen Formula (TSF) is a traditional Chinese herbal medicine that has been used to treat DKD. In this study, streptozotocin injection and uninephrectomy-induced diabetic nephropathy (DN) rat model was established to explore the impact of TSF on gut microbiota composition, gut-derived toxins, and the downstream inflammatory pathway of urotoxins in the kidney. TSF treatment for 12 weeks showed significant attenuation of both renal histologic injuries and urinary excretion of albumin compared with DN rats without treatment. TSF treatment also reconstructed gut dysbiosis and reduced levels of indoxyl sulfate and metabolic endotoxemia/lipopolysaccharide. MCP-1 and TNF-α were decreased by TSF both in the serum and kidney. In addition, we revealed that the inhibitory effect of TSF on renal inflammation was associated with the inhibition of aryl hydrocarbon, a receptor of indoxyl sulfate, and TLR4, thereby inhibiting JNK and NF-κB signaling in the kidney. Spearman correlation analysis found that a cluster of gut bacterial phyla and genera were significantly correlated with renal pathology, renal function, and systemic inflammation. In conclusion, orally administered TSF significantly inhibited diabetic renal injury, and modulated gut microbiota, which decreased levels of lipopolysaccharide and indoxyl sulfate, and attenuated renal inflammation. Our results indicate that TSF may be used as an agent in the prevention of gut dysbiosis and elimination of intestinal toxins in DN individuals.