IMPACT OF CORPORATE TAX ON NEPLEASE COMMERCIAL

BANKS

BY
ASTHA POUDEL
Exam roll no:27559/20
TU Reg no:7-2-54-8-2020

TITLE

A Summer Project Report Submitted to

Faculty of Management, Tribhuvan University
in partial fulfillment of the requirements for the degree of

Bachelor of Business Administration

at the
Mahendra Multiple Campus
Tribhuvan University

Ghorahi, Dang
Dec,2024
 STUDENT DECLARATION

I hereby declare that the project work entitled “IMPACT OF CORPORATE TAX ON
NEPALESE COMMERCIAL BANKS” submitted to the Faculty of Management,
Tribhuvan University, Kathmandu is an original piece of work under the supervision of
“Mr.Khadananda Khanal”, faculty member of Mahendra Multiple Campus, Ghorahi Dang
and is submitted in partial fulfillment of the requirements for the degree of Bachelor of
Business Administration (BBA). This project work report has not been submitted to any
other university or institution for the award of any degree or diploma.

Date: 2081/8/24
………………………..

Astha Poudel

ii
 CERTIFICATE FROM THE SUPERVISOR

This project work report entitled “ImpB act Of Corporate Tax On Profitability Of
Nepalese Commercial Banks” submitted by Astha Poudel of Mahendra Multiple Campus,
Dang is prepared under my supervision as per the producer and format requirements laid
by the Faculty of Management, as partial fulfillment of the requirement for the degree of
Bachelor of Business Administration (BBA). I therefore, recommend the project work
report for evaluation.

Signature……………………….
Name: Khadananda Khanal
Date: 2081/8/24

iii
 ACKNOWLEDGMENT

This report has been prepared to fulfill the partial requirements for the degree of Bachelor
of Business Administration (BBA) of Tribhuvan University. For this, I would like to
acknowledge the effort of Office of the Dean, Faculty of Management, T.U., for offering
such a great course in our syllables to enhance the quality of management education in the
country. This product of research, definitely is my original work, would not have taken this
shape without sincere help and continuous encouragement from different respectable
persons. I feel my duty to remember and express my heartfelt acknowledgment to those all.
The success and final outcome of the project required a lot of guidance and assistance from
many people. So, first and foremost I would like to offer sincere gratitude to the faculty
members of Mahendra Multiple Campus for providing advice and support while carrying
out this study. First, I would like to extend my cordial thanks and deep gratitude towards
my reverent supervisor Mr.Khadananda Khanal for his kind guidance & encouragement
throughout the research work. I am very thankful to director of BBA Mr. Khadananda
Khanal faculty member of Mahendra Multiple Campus, for facilitating with necessary
ideas, materials, and support that are required to complete this study. I am also grateful to
all my friends.
Finally, I would like to extend my gratitude towards my family for always supporting and
encouraging me in completing the project on time.

Astha Poudel

iv
 TABLE OF CONTENT

TITLE......................................................................................................................................

STUDENT DECLARATION..................................................................................................

CERTIFICATE FROM THE SUPERVISOR........................................................................

ACKNOWLEDGMENT.........................................................................................................

TABLE OF CONTENT...........................................................................................................

LIST OF TABLES..................................................................................................................

LIST OF FIGURES..............................................................................................................

EXECUTIVE SUMMARY...................................................................................................

LIST OF ABBREVIATION....................................................................................................

CHAPTER I: INTRODUCTION.......................................................................................

Context Information...........................................................................................................
Purpose Of The Study........................................................................................................
Significance Of The Study.................................................................................................
Literature Survey................................................................................................................
Limitations Of The Study.................................................................................................
CHAPTER II: DATA PRESENTATION AND ANALYSIS.........................................

Respondent Profile...........................................................................................................
Data Presentation and Analysis........................................................................................
Findings and Discussion...................................................................................................
CHAPTER III: CONCLUSION AND ACTION IMPLICATION................................

Summary..........................................................................................................................
Conclusion and Action implication..................................................................................
Bibliography
Appendices

v
 LIST OF TABLES

Table 1:Sample bank for the study...........................................................................

Table 2:Return on assets of selected bank................................................................
Table 3:Data Analysis of CIT(%)of selected banks..................................................
Table 4:Ln(TA) of selected banks..............................................................................
Table 5:CDR(%) of selected banks...........................................................................
Table 6:CRR(%)of selected bank.............................................................................
Table 7:Data and Descriptive Statistics of study variable(n=50).............................
Table 8:Pearson Correlation matrix of study variables(n=50)..................................
Table 9:Regression Analysis of corporate income tax on the
profitability ..............................................................................................................

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 LIST OF FIGURES

Figure 1:Trend chart of ROA of selected banks..................................................................

Figure 2:Trend chart of CIT(%) of selected banks..............................................................
Figure 3:Trend chart of Bank size [Ln(TA)]of selected banks............................................
Figure 4:Trend chart of CDR(%)of selected banks..............................................................
Figure 5:The trend of CCR(%)of selected banks.................................................................

vii
 EXECUTIVE SUMMARY

The main objective of this study is to investigate the impact of corporate income tax on the
profitability of Nepalese commercial banks. Tax refers to the compulsion imposed by the
government of any country on the net income of the business. The payment of taxes is
actually supposed to be according to income earned which ordinarily should not have been
a burden since those that earn higher pay more taxes and the low-income earner pays fewer
taxes.

A tax on bank profits, for instance, reduces the amount that banks can pay to depositors,
bank tellers, furniture makers who supply bank offices, shareholders, etc. To generate the
huge amounts of money necessary to run the welfare state, though, governments create tax
collection agencies to keep tabs on the finances of millions of individuals.

Taxation of banks is of particular interest for various reasons. First, banks are financial
intermediaries that perform unique and crucial functions, although in many countries they
are currently subject to increasing competition from investment funds and security
markets. Second, banks are heavily regulated and monitored, which reduces the
administrative costs of some forms of taxation, and at the same time, they are subsidized
through underpriced deposit insurance and bailouts of insolvent banks.

This study has taken the Corporate Income Tax (CIT), Credit Deposit Ratio (CDR), Credit
Reserve Ratio (CRR) and Banks Size as tax proxies whereas Return on asset (ROA) is
proxy of profitability or bank performance. The data are extracted from annual reports of
four banks (SANIMA, MBL, GBIME, SBL, and NABIL) which are taken as a sample for
the study. These data are analyzed using the regression model.

It tries to minimize the research gap by emphasizing the effects of corporate tax on the
financial performance of Nepalese commercial banks. The study helps to understand the
relationship between tax and profitability of the banks. This study will be a source of help
for a number of entities, individuals, researchers, and institutions, in order to maintain their
investments and achieve the greatest possible return.

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 LIST OF ABBREVIATION

Acronyms Full forms

ATM Automatic Teller Machine
BFI Bank and Financial Institutions
BLB Branchless Banking
BFI Bank and Financial Institutions
CDR Credit Deposit Ratio
CIT Corporate Income Tax
CRR Credit Reserve Ratio
C.V. Coefficient of Variation
DRS Disaster Recovery System
EPS Earnings Per Share
F/Y Fiscal Year
GBIME Global IME Bank Limitedss
ITA Income Tax Act
MBL Machhapuchre Bank Limited
NABIL Nabil Bank Limited
NRB Nepal Rastra Bank
NSE Nairobi Securities Exchange
OECD Organization for Economic Co-operation and Development
ROA Return on Assets
ROE Return on Equity
RWA Risk-Weighted Assets
SANIMA Sanima Bank Limited
SBL Siddhartha Bank Limited
S.D Standard deviation

ix
 1

CHAPTER I: INTRODUCTION

Context Information
Corporate tax is a tax imposed on the net income of the company. A corporate tax, also
called corporation tax or company tax, is a direct tax imposed by a jurisdiction on the
income or capital of corporations or analogous legal entities. Many countries impose such
taxes at the national level, and a similar tax may be imposed at state or local levels. The
taxes may also be referred to as income tax or capital tax. Generally, the tax is imposed on
net profits. Countries may have tax corporations on its net profit and may also tax
shareholders when the corporation pays a dividend. Where dividends are taxed, a
corporation may be required to withhold tax before the dividend is distributed.
While talking in the context of Nepal, Tax is collected to enhance revenue mobilization
through effective revenue collection procedure for the economic development of the
nation. Income is taxed in accordance with the provisions of Income Tax Act 2002
(ITA).Tax is levied under the provision of the Income Tax Act 2002, which provides for
the imposition and collection of tax on the income of companies. Resident companies are
subject to tax on their worldwide income. Nonresidents are required to pay tax on their net
income acquired or earned in Nepal or income with source in Nepal. Tax is levied on the
net income after making deductions for certain expenses/allowances as specified in the
ITA.
Tax doesn't only affect corporate business but also the banks especially commercial banks
of the country. Tax plays a huge role in the financial operation of banks as well.
Commercial banks, due to their position in the financial system, they basically are a
necessary part in ensuring the correct and timely tax payments to the state budget, which
certainly affects the economy as a whole. Despite the periodical changes in legal bank
taxation, in regulation and in reforming, the banks are not still the "locomotive" of the
economy.

ITA (2002) has different tax pattern on the basis of the company's category.
According to ITA (2002), All BFI’s registered under Company Act (2063) is bound to pay
30 percent of total income as a flat rate to government. However, BFI's are allowed a
deduction for impairment of non-performing assets (loan loss provision) subject to 5
percent of the total loan outstanding.
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“Taxes do not serve as the main tool in the development of commercial banks. However,
tax optimization will enhance other tools, which influence the development of this sector
of the economy. Financial activity of the state in the field of tax collection and in
improvement of the investment climate will be effective only in the case of creating an
optimal mechanism of tax administration, which involves, on one hand, the possibility of
replenishment of the state budget, and on another - the absence of reasons for tax evasion"
(Vorozhbit et al., 2015). Reduction on tax will reduce the tax evasion problem generally
faced by every economy in the world along with that it also mobilizes steady funds by
encouraging investment in various sectors.

However, it has been noted that taxation is the major revenue source of the government in
every country, the life wire of every nation and a function of the level of development seen
in a nation. Corporate taxes denote one of the main sources of income to finance
government budget, but also an important determinant of capital investment in every
nation (Pitulice et al., 2016). The government is concerned about raising more revenue to
finance its expenditure responsibilities while investors are interested in a conducive,
business environment with a reduced tax burden (Pitulice et al., 2016).

The payment of taxes is actually supposed to be according to income earned which

ordinarily should not have been a burden since those that earn higher pay more taxes and
the low-income earner pay fewer taxes (Bon et al., 2007). However, the high rate of
company income tax has created the problem of tax evasion and avoidance of firms in
Nigeria. Tax avoidance is the willful and different lawful ways a taxpayer tries to reduce
or eliminate his/her tax liabilities while tax evasion is the unlawful act to prevent payment
of tax (Mughal &Akram, 2012).

High tax rates affect the banks by reducing the amount of credits banks could make
available to the private sectors. Since the only investment banks make is majorly to give
businesses loan facility to enable them to earn the interest on it, the high company income
tax on the profitability of banks is also compounding the liquidity challenges they are
facing.
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Statement of problems

Corporate taxation is the compulsion imposed by the government to every corporate

business which includes commercial banks. Banks are the financial regulatory body in the
country that accepts deposit and provides the loan. Those firms provide various services
and are generally profit motive. Their drive for profit motivates them to introduce new bi-
products for retaining new customers as well as to gain the loyalty of existing customers.
While every bank is determinant towards achieving their predetermined goals, the tax
imposed somewhere plays an important role or can be said the obstacle in getting to the
target. Due to the frustration, banks now employ the services of financial experts who
could manipulate tax laws so as to reduce the burden of corporate taxation on them. This
has led to a high profile of tax avoidance for companies who could afford to hire tax
consultants to lessen their tax liability by all means. The struggle leaves the government
with less revenue and at the same time has brought companies so many unresolved tax
issues with the government.
So, the study is conducted further to get a clear concept about tax and its effect on the
profitability of commercial banks prevailing in Nepal. For that, the study focuses to answer
the related question in order to make the research more effective. The issues related to the
taxation of commercial banks under the study have been presented briefly as follows:

• How much do the selected banks contribute to corporate taxation?

• Is there any relationship between corporate tax and profitability of the selected commercial
banks?
• What are the supporting variables undertaken for the study?
• What is the impact of corporate tax on overall profitability?

Purpose Of The Study

The main objective of the study is to investigate the impact of corporate taxation on the
profitability of Nepalese Commercial Banks. The study emphasizes on profitability in
relation to corporate tax.
The specific purposes of the study are listed as follows:
• To analyze the position of corporate tax (CIT, Bank size, CDR, CRR) and profitability of
Nepalese commercial banks.
 4

• To examine the relationship between corporate tax (CIT, Bank size, CDR, CRR) and
profitability of Nepalese commercial banks.

• To examine the impact of CIT, Bank size, CDR and CRR of Nepalese commercial banks.

Significance Of The Study

The main aim of this research project is to assess the impact of corporate taxation on the
profitability of Nepalese Commercial Banks over a period of ten years (2014-2023). The
significance of this study is to identify, analyze and interpret the portion of impact on
profitability. This study will also help bankers to analyze the past corporate tax and its

impact on profitability. Some of the significance of the study are as follows:

• The study will be a source of help for a number of entities, individuals, researchers, and
institutions in order to overcome the tax burden.
• The study will help bankers to carry out necessary steps to determine tax rates and its
effect on banking activities.
• The study will broaden the concept of the necessity of tax payment as being part of
corporate society.
• The study will emphasize on earning a profit after making a contribution to government
revenue.
• The study will help to evaluate the depth of impact made by the tax on the bank's
profitability.

Literature Survey
This chapter is concerned with the review of relevant kinds of literature available in the
books, journals articles, research reports, newspapers and magazines, policy documents
which are published or unpublished. The study is based on previous studies regarding
corporate taxation. The previous studies should not be ignored as it provides the
foundation to the present study. Various thesis work related to the tax effect of the
different organization is also reviewed for the purpose of justifying the study. Reviewing
literature is divided into three parts: conceptual review, review of related studies and
concluding remarks.

Conceptual review
 5

Tax is a charge usually of money imposed by authority on persons or property for public
purposes. It is a sum levied on members of an organization to defray expenses. The
variables selected for the study were the number of corporate tax expenses based on 30%
CIT rate applied by banks on their profit and ROA was used as a proxy for profitability.
The CIT amount is the independent variable while the dependent variable is the ROA for
the periods covered by the study. Along with that, bank size, CRR, CDR, and Current
Ratio are considered as controlling variables.

Corporate tax and profitability

Taxation of corporate profits is a vital element of fiscal policy, it influences both

macroeconomic and microeconomic. Therefore, tax law reforms targeted towards keeping
tax rate low could increase the value of companies (Neghina, 2012). The importance of
corporate profitability and of keeping corporate tax rate low cannot be overemphasized. It
is such that every government that considers economic and employment growth a priority
must reflect in their fiscal policy (Canadian Manufacturers & Exporters, 2015). Tax plays a
negative role in increasing the firm's value.

Bank size, CDR, CRR, and corporate taxation

The tax has its adverse effect on the controlling variables as well. Corporate income taxes
do influence the net rate of return to savers . Banks with higher CIT hold lower risk-
weighted assets (RWA) – conditional on a wide range of bank and country characteristics.
A 10-percentage-point increase in CIT leads to a reduction of RWA relative to total assets
of 2-7 percentage points (Horvath, 2013). Demirgüc-Kunt and Huizinga (2001) analyzed
bank-level data for 80 countries (1988-1995) and find that a large part of bank taxes is
passed on to banks' customers by increasing the spread between lending and deposit rate.
Albertazzi and Gambacorta (2010) analyze country-level data in the OECD for the period
1981-2003 and find that 90% of the corporate income tax is passed by banks to their
customers by raising lending rates.

Corporate taxation reduces the cash flows available for new lending and reduces the after-
tax rate of return on lending, higher tax rates could, in turn, constrain lending.
A reduction of the CIT rate, loan supply may simply reduce as it would happen with any
other firm after an increase of the marginal cost. Bank illiquidity played a prominent role
 6

in the 2007-09 financial crisis (Cornett et al. 2011).As corporate taxation decreases the
amount of pre-tax operating cash flows that are available to use for liquidity management,
increases in the corporate tax rate could lead banks to increase liquid asset holdings. We
find that on average, bank income taxes are not significantly associated with liquid asset
holdings.

Review of related studies

Ezeugwuand and Akubo (2014) studied the effect of the high corporate tax rate on the
profitability of corporate organizations in Nigeria. The problem the study was concerned
about is the extent to which high corporate tax rate threatens the survival of companies in
Nigeria. The study found a positive relationship between corporate tax rate and realized a
profit of companies. It was therefore recommended that the Nigerian Corporate tax rate of
30% should be reduced to avoid negative economic effects in the Country.

Pitulice (2016) evaluated the impact of corporate tax on the financial performance of firms.
The sample used in the study comprised a total number of 20 firms listed on the Bucharest
Stock Exchange. The secondary data the study employed were obtained from the
published financial statements of the firms for the period of 2012 to 2014. The statistical
tool used for data analysis was the multi-regression analysis with the aid of E-view 9. The
dependent variables were the net profit and return on assets while the independent
variables were the effective tax rate, firm size, asset structure, long-term debt to total assets
ratio and financial leverage. The study excluded independent variables with no significant
impact and then found evidence that corporate tax and the effective tax rate had a negative
significant impact on the financial performance of firms.

Chude and Chude (2015) studied the impact of company income taxation on the
profitability of companies in Nigeria using the Brewery Industry as a case study. The
dependent variable was the earning per share (EPS) while the explanatory variable was the
company income tax (CIT). The result indicated the existence of a long-run equilibrium
relationship and a positive significant impact of CIT on the EPS (P-Value 0.000 < 0.05).
The study concluded that CIT affects the profitability of Nigerian Breweries significantly
and recommended more improvement in tax administration.
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Syed et al. (2011) studied the effect of Corporate Income Tax and Firms' size on capital
investment made intangible assets by the manufacturing firms. The study used 65
manufacturing companies as the sample. In order to draw inference from the study, panel
financial data on an annual basis was gathered for a period of six years, spanning from
2004-2009. The results indicated the existence of a negative relationship between
corporate income tax and investment while a positive relationship between firms' size and
investment was found. Thus, the study concluded that excess tax obligations on companies
could discourage corporate investors.

Neghina (2012) examined tax impact on the financial performance of companies listed on
the Bucharest Stock Exchange (the Stock Exchange of Romania, the Sovereign State
located in Southeastern Europe). The impact problem of profits tax on corporations was
the issue the study addressed among others. Out of 31 companies, the paper used data for
25 companies listed on the Bucharest Stock Exchange from 2006-2011. The selected
parameters relevant to the economic and financial strength of the companies were Return
on Equity (ROE), Return on Assets (ROA), Financial Leverage (FL), Effective tax rate,
Firm size, Relative increase in total assets and Effective interest rate. The regression
analysis revealed a negative correlation between the effective tax rate, interest rate and
performance, and a positive relationship between leverage, firm size, the relative growth of
the company and financial performance. The study, therefore, confirmed certain theories
which hold that increased leverage enhances company performance.

Shrestha (2018) conducted a comprehensive analysis of corporate taxation and bank

profitability using data from Nepalese commercial banks. Employing regression analysis,
the study found that higher corporate tax rates have a detrimental effect on bank
profitability. This suggests that tax policies significantly influence the financial
performance of banks in Nepal, with implications for their profitability metrics.

Nekasa et al. (2017) employed a mixed research design to evaluate the effect of corporate
income tax on the financial performance of companies listed on the Nairobi Securities
Exchange (NSE) in Kenya. A Sample of 59 publicly listed companies in 2015 was
extracted from the NSE website. The secondary data were obtained and the predictor
variables were: investment, Age/Debt, Firm Size, and Liquidity, while the dependent
variables were profitability and Return on Investment of firms. The regression result
 8

revealed that corporate income tax had a significant positive influence on the financial
performance of companies listed on the NSE in Kenya. The study supported the view that
corporate income tax has a significant effect on financial performance and encouraged
policies that could ensure that firms promptly pay their corporate taxes to the government.

Thapa et al. (2020) examined how banks manage their tax liabilities to enhance
profitability. The study underscores the significance of effective tax planning in mitigating
the adverse effects of high corporate tax rates on bank profitability. By employing various
tax optimization techniques, banks can potentially offset the impact of tax burdens on their
bottom line.

Conceptual framework
In conclusion, the purpose of this study is to see what new contribution can be made and
receive some ideas, knowledge, and suggestions in relation to the impact of corporate tax
on the profitability of commercial banks. A corporate tax directly or indirectly affects the
overall profitability and other related activities of the banks. The previous studies cannot
be ignored because they provide the foundation for the present study. This study is
continuity in research and is ensured by linking the present study with past research
studies.

To fill the research gap this study should be done as many researchers have done the study
limiting to their own locality. So, this study basically focuses on the relationship between
tax and net income of Nepalese commercial banks. Based on the studies the following
conceptual framework is developed:

INDEPENDENT VARIABLE DEPENDENT VARIABLES

 9

CIT

Bank Size Return on Asset (ROA)

CDR

CRR

Figure 1.1 Conceptual Framework

Research Methodology
Research Methodology refers to the process used to collect information and data for the
purpose of making business decisions. In other words, research methodology is a process
of arriving at the solution of the problem through planned and systematic dealing with
collection analysis and interpretation of the facts and figures. It is also considered as the

path from which the researcher can systematically solve the research problem.
The research methodology used will give rise to diversities of perception, interceptions,
description, conception and even misconception of possible and probable relevancy,
validity and significance toward researchers and readers alike. We can conclude that
research methodology tries to make a clear view of the method and process adopted in the
entire aspect of the study. In this chapter, efforts have been made to present and explain
specific research design in order to obtain the objectives. It describes the methods and
process applied in the entire subject of the study. It is the plan, structure, and strategy of
investigation conceived to answer the research questions. It covers quantitative
methodology using financial and statistical tools.

Research Design
A research design is the set of methods and procedures used in collecting and analyzing
measures of the variables specified in the problem research. The design of a study defines
the study type (descriptive, correlation, experimental, historical, casual comparative) and
sub-type (e.g., descriptive-longitudinal, case study) based on which the study is done.
 10

A research design is an overall framework for completing his/her work since the beginning
to the end. "Research design is the plan, structure, and strategy of investigation conceived
so as to obtain the answer to the research question and to control variances. The plan is the
overall scheme or program of the research (Kerling, 1986). In the study, a descriptive
research design is used to collect quantifiable information to be used for statistical analysis
of the population sample. This method of research helps to get a direct answer to research
questions.
Population and Sample
A population is an aggregate of creatures, things, cases and so on. Population denotes a
large group consisting of elements having at least one common feature. The term is often
contrasted with the sample, which is nothing but a part of the population that is so selected
to represent the entire group. It's impossible to study the whole population so the
researcher selects a portion as a sample and conduct research being based on that selected
sample.
There are altogether 20 commercial banks (including government-owned, private and joint
ventures). This referred to as the population of the bank. It is not possible to study all of
them due to lack of time and other factors. So, for the study 5 banks are selected as
samples that represent the whole population and the conclusion drawn will be generalized
at the end. The sample banks are Sanima Bank limited, Global IME Bank Limited,
Siddhartha Bank Limited Machapuchre Bank limited and Nabil Bank Limited. For the
study, financial statements of sample banks from past eleven years i.e. F/Y 2013/14 to F/Y
2022/23 are extracted for evaluating the impact of tax on profitability. The details of the
banks selected have been depicted in the table below:

Table 1:Sample bank for the study

S.N Name of the Bank Indicator Period Observation

1 Sanima Bank Limited SANIMA 2013/14-2022/23 10
2 Global IME Bank Limited GBIME 2013/14-2022/23 10
3 Machhapuchchhre bank Limited MBL 2013/14-2022/23 10
4 Siddhartha Bank Limited SBL 2013/14-2022/23 10

5 Nabil Bank Limited NABIL 2013/14-2022/23 10

Total 50

Source: Annual Report of selected banks and results are drawn using MS – Excel.
 11

Sources of Data
Data simply refers to the raw fact used to gain informative results. The study either based
on primary or secondary data. For the study, secondary data are used. Those data are
collected from a various source which are listed below:
• Annual reports and financial statements of selected banks.
• Banks websites and other relative websites.

Tools and Techniques of Data Analysis

The data are presented in tables and graph. After which they are analyzed and interpreted.
Various tools and techniques are used to interpret the conclusion. The main analytical tools
and techniques used for analysis are:
Descriptive Statistics
Descriptive statistics is concerned with measures of central tendency and measures of
variability. It is a summary statistic that quantitatively describes or summarizes features of
a collection of information. Measures of central tendency include the mean, median, and
mode, while measures of variability include the standard deviation, variance, the
minimum, and maximum variables.

Arithmetic Mean (X̅ )

The arithmetic mean is commonly known as average. The average of a given set of
numbers is called the arithmetic mean, or simply, the mean of the given numbers. It is a
representative of the entire mass of homogeneous data, its value lies somewhere in
between the two extremes, i.e. the largest and the smallest items. It is calculated by
dividing the sum of the quantities by the number of items.

Mean (X̅ ) =

Where,
∑ x = sum of x series
N= number of items

Standard Deviation (S.D)

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Standard deviation is a measure that is used to quantify the amount of variation or

dispersion of a set of data values. Generally, it is denoted by small Greek letter σ (read as
sigma). It is calculated as the square root of variance by determining the variation between
each data point relative to the mean.

S.D.(σ)=
Were,
̅̅̄
d = (X-X̅̅ )

Coefficient of variation (C.V)

Coefficient of Variation is a standardized measure of the dispersion of a probability
distribution or frequency distribution. Coefficient of variation (CV), also known as relative
standard deviation (RSD)It is often expressed as a percentage and is defined as the ratio of
the standard deviation to the mean. It is calculated as:
SD
Coefficient of Variation (C.V.) =
Mean

Correlation analysis
Correlation analysis is a method of statistical evaluation used to study the strength of a
relationship between two, numerically measured, continuous variables. Pearson correlation
is the most widely used correlation statistic to measure the degree of the relationship
between linearly related variables. It is developed by Karl Pearson.
The correlation coefficient can range from -1.00 to +1.00. A value of -1.00 indicates a
perfect negative correlation, which means that as the value of one variable increases, the
other decreases. While a value of +1.00 represents a perfect positive relationship, meaning
that as one variable increases in value, so does the other. As the correlation coefficient
value goes towards 0 that represents no relationship between variables being tested. The
formula used to calculate the Pearson correlation:

Where,
N = number of pairs of scores
∑xy =sum of the products of paired scores
∑x = sum of x scores
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∑y = sum of y scores
∑x2= sum of squared x scores
∑y2 =sum of squared y scores

Regression analysis
Regression is a statistical method for investing relationships between the variables by
establishing an appropriate functional relationship between them. It is considered as a

useful tool for determining the strength of the relationship between two or more variables .
It is calculated as:

Regression equation (𝒚)= 𝒂+𝒃𝒙

Where,

X and Y are variables b = slope of the regression line is also called the regression
coefficient ɑ =intercept point of regression N = number of values

∑X= sum of x scores

∑Y= sum of y scores
∑XY =sum of the products of paired scores
∑X2= sum of squared x scores
In this study following regression equation is formed to find relationship between different
variables.
(ROAit =β0+ β1CITit + β2Lntait+ β3CDRit+ β4CRRit+ eit)
Where, CIT = corporate income tax
Ln(TA) = bank size
CDR = credit deposit ratio
CRR = cash reserve ratio

Study variables
Variables are anything that has a quantity or quality that varies. This study concerns the
following dependent and independent variables.
 14

Dependent variable

Return on Asset (ROA)

ROA is a financial ratio that shows the percentage of profit a company earns in relation to
its overall resources. It is commonly defined as net income divided by total assets.
Net income
ROA=
Total assets

Higher the ROA, the better management. ROA is a good internal management ratio
because it measures profit against all of the assets a division uses to make those earnings.
Hence, it is a way to evaluate the division's profitability and effectiveness. It's also more
appropriate here because division managers seldom get involved in raising money or in
deciding the mix between debt and equity (Kristy&Susan1984).

Independent Variables

Corporate Income Tax (CIT)

The taxes are collected for the purpose of executing government responsibilities in form of
defense, provision of education and health services, infrastructures and as a fiscal tool to
control the economy (Institute of Chartered Accountants of Nigeria, 2014). Company
Income Tax as one of the taxes collected by the government for national development is
levied on the chargeable profits of all companies operating in the country except those
exempted as specified by the Act (Ezugwu & Akubo, 2014). According to Syed and Zia
(2011), company income tax is one that is charged on the profits generated by companies,
public corporations and unincorporated associations such as industrial and provident
societies, clubs and trade associations after every accounting period. It is calculated as:
Provision before Tax
CIT=
Earning before Tax
properly to mean the total scale of assets to which a firm is exposed, including balance
sheet assets plus the notional value of any derivatives plus any off-balance-sheet
commitments, and then size is basically everything.

Credit Deposit Ratio (CDR)

 15

CDR is used to assess a bank's liquidity by comparing a bank's total credit to its total
deposits for the same period. The CDR is expressed as a percentage. If the ratio is too high,
it means that the bank may not have enough liquidity to cover any unforeseen fund
requirements. Conversely, if the ratio is too low, the bank may not be earning as much as it
could be (Murphy, 2019).
Total Loan
CDR=
Total Deposit
Cash Reserve Ratio (CRR)
CRR refers to a certain percentage of total deposits the commercial banks are required to
maintain in the form of cash reserve with the central bank. It prevents the shortage of funds
in meeting the demand by the depositor. The amount of reserve to be maintained depends
on the bank’s experience regarding the cash demand by the depositors. In the context of
Nepal, according to the Nepal Rastra Bank the cash reserve ratio (CRR) for commercial
bank is 4 percent and also remains unchanged from the previous year (the Kathmandu
Post, 2023).

Limitations Of The Study

This project report is prepared is for the partial fulfillment of the requirements for the
degree of Bachelor in Business Administration. The research work is done based on its
format though it has various limitations which are listed as:
• Out of 20 banks, only 5 banks (SANIMA, GBIME, MBL, SBL, and NABIL) are taken as a
sample. Due to which conclusion drawn might not be applicable to other banks.
• The study is conducted taking data of only past 10 years i.e. F/Y 2013/14 to F/Y 2022/23.
This might not be enough to obtain the exact results.
• The research is based on secondary data as data are extracted from annual reports, financial
statement, Articles, and Journals. It may or may not provide the exact vision of the field.
So the reliability of this research will highly depend upon the accuracy of information. If
available data are not accurate, the whole findings of the study will be meaningless.
• The research focuses on the study of Nepalese banks with special reference to Corporate
Income Tax.
• The reliability of tools, lack of research experiences, time constraints and lack of data are
the other limitation of this study.
 16

• This research is mainly done to fulfill the partial requirement of Bachelor of Business
Administration of Tribhuvan University, so limited time and resources are also the main
limitations of the study.

Organization of the study

This research is mainly done to fulfill the partial requirement of Bachelor of Business
Administration of Tribhuvan University, so limited time and resources are also the main
limitations of the study. The study has been divided into three chapters.
Chapter I deal with the general background of the study, Statement of the problems,
Objective of the study, Significance of the study, Literature Survey, Research methodology
and Limitation of the study. Literature survey further classified into Conceptual Review,
Review of Related studies and Theoretical Framework based on empirical studies.
Research Methodology includes Research Design, Population and Sample, Sources of data,
Tools, and Techniques of Data Analysis and Study Variables.

Chapter II is related to data presentation and data analysis. This chapter includes
organizational profile, data presentation, Data analysis by using various tools like a
descriptive statistic, correlation and regression analysis of variables and the chapter contain
the finding of the study. Tables and trend chart are developed to present data findings.

Chapter III is concerned with the conclusion and action implications of the study. The
whole study is briefly described with major findings and relevant ideas for better results.
Action implications deal with filling the defects to make further study more relevant.
 17

CHAPTER II: DATA PRESENTATION AND ANALYSIS

Respondent Profile

This chapter deals with the presentation, analysis, and interpretation of

statistical evidence to clarify the research works. This is the most important
part of the study as it shows the relationship between variables through the
presentation of data and their analysis process. Data for analysis can be
obtained from the different sources and they can be presented as tables or
charts like bar diagram, graphs, etc. This leads the study toward its accurate
conclusion. The data collected from selected sample banks through Annual
reports, Journals, Articles, etc are organized and then classified in a proper
manner. For the study four banks are selected as samples (SANIMA, MBL,
GBIME, SBL, and NABIL). The data are collected from secondary sources
for generating findings regarding the impact of corporate tax on the
profitability of Nepalese commercial banks. Data from F/Y 2013/14 to F/Y
2022/2023 are collected from each bank and have been analyzed.

Following are the four banks selected for data analysis.

Sanima Bank Limited (SANIMA)

Sanima Bank commenced its operation in 2004 as a National Level Development Bank.
Since February 2012, Sanima has been functioning as an "A" Class Commercial Bank with
its registered office at 'Alakapuri', Naxal, Kathmandu. The bank is promoted by a group of
Non-Resident Nepalese (NRNs) businessman Mr. Bhuvan Kumar Dahal is the Chief
Executive Officer of the bank. The bank’s equity share is listed in Nepal stock exchange.
ICRA had reaffirmed that there is an improvement in Samina's market positioning in recent
year as a result of high portfolio growth, partly aided by expansion in its branch network.
Despite its short track record as a class A commercial bank, Sanima has grown in scale at a
healthy pace and remains comparable to the banks with a relatively long history. Since its
operation, this bank is providing various facilities regarding the product both to personal
banking as well as business banking.
 18

Machhapuchchhre Bank Limited

Machhapuchchhre Bank Limited was registered in 1998 as the first regional commercial
bank from the western region of Nepal and started its banking operations from Pokhara
since the year 2000. The Bank facilitates its customer needs by delivering the best of
services in combination with the latest state of the art technologies and prudent
international practices. The Bank is the pioneer in introducing the latest technology in the
banking industry in the country. It is the first bank to introduce centralized banking
software, GLOBUS BANKING SYSTEM of Temenos NV, Switzerland. The bank
provides modern banking facilities such as Any Branch Banking, Internet Banking, Mobile
Banking, Safe Deposit Locker facilities, Utility Bill payment (Telephone & Mobile), ATM
(VISA Debit Cards) to its valued customers. Besides these, the Bank is providing 365
Days Banking and Evening Counter services to the customers through many of its offices.
The Bank has been promoted by highly renowned Non-Residential Nepalese, prominent
businessman and industrialists with a vision and dedication to provide the best financial
products and services in the most efficient and professional manner. It has the aim to be the
first choice of people. The mission is to be one of the most preferred banks in Nepal, easily
recognized as the bank which satisfies and cares for its customers through quality service,
innovative products, professionalism, and wide branch network, offering a full array of
financial services using modern technology and with good corporate governance practices.

Global IME Bank Limited

Global Bank Limited (GBL) was established in 2007 as an ‘A' class commercial bank in
Nepal which provided entire commercial banking services. The bank was established with
the largest capital base at the time with paid-up capital of NPR 1.0 billion. The paid-up
capital of the bank has since been increased to NPR 21.61billion.
Later on, the bank was named as Global IME Bank Ltd. (GIBL) after successful merger of
Global Bank Ltd (an "A" class commercial bank), IME Financial Institution (a "C" class
finance company) and Lord Buddha Finance Ltd. (a "C" class finance company) in the
year 2012. Two more development banks (Social Development Bank and Gulmi Bikas
Bank) merged with Global IME Bank Ltd in the year 2013. Later, in the year 2014, Global
IME Bank made another merger with

Commerz and Trust Bank Nepal Ltd. (an “A” class commercial bank). During 2015-16,
Global IME Bank Limited acquired Pacific Development Bank Limited (a "B" Class
 19

Development Bank) and Reliable Development Bank Limited (a "B" Class Development
Bank).

Siddhartha Bank Limited

Siddhartha Bank Limited (SBL), established in 2002 and promoted by prominent
personalities of Nepal, today stands as one of the consistently growing banks in Nepal.
While the promoters come from a wide range of sectors, they possess immense business
acumen and share their valuable experiences towards the betterment of the Bank. It has its
head office in Hattisar, Kathmandu.
Siddhartha Bank has been posting growth in its portfolio size and profitability consistently
since the beginning of its operations. Siddhartha Bank has been able to gain the significant
trust of the customers and all other stakeholders to become one of the most promising
commercial banks in the country in less than 15 years of its operation. The Bank is fully
committed to customer satisfaction. The range and scope of modern banking products and
services the Bank has been providing is an example of its commitment towards customer
satisfaction. The Bank runs with a vision to be financially sound, operationally efficient
and keep abreast with technological developments. SBL is now operating 189 branches, 53
inside the valley and 136 outside the valley. It also provides an ATM service. It has 208
ATMs in total, 65 inside the valley and 143 outside the valley.

Nabil Bank Limited

Nabil Bank Limited, established in 1984 as Nepal Arab Bank Limited before rebranding in
1996, stands as a cornerstone of Nepal's banking sector. Nabil Bank’s mission is to become
the Bank of 1st choice of all its stakeholders - including all strata of customers of retail,
SME, corporate, state-owned enterprises, non-profit entities, multinational development
agencies, along with the Bank’s employees and shareholders. The Bank strives to be a one-
stop solutions provider by offering a complete line of commercial banking products such
as branch banking, treasury, trade, cards, remittance, and investment banking. The expert
team of highly skilled professionals provides industry-specific guidance and advisory for
efficient financial management, resulting in higher customer profitability.

Nabil Bank operates through its wide network of 266 branch offices, 313 ATMs, numerous
POS terminals, remittance agents and sub-agents 20000 plus spread across the nation. The
 20

Bank also has over 200+ international correspondent banking relationships. The Bank
operates its investment banking arm through its subsidiary Nabil Investment Banking Ltd.

The Bank understands that its role goes beyond just financial transaction, And towards the
development of society as well. Hence, the Bank is highly active in creating financial
literacy and providing financial access to a large section of the population across the
country as part of its Corporate Social Responsibility. Extending credit to deprived sectors
of the society through micro-lending and financing priority sectors that include agriculture,
renewable energy and tourism are key areas that define the Bank’s commitment to the
country’s development initiative. Nabil Bank has also established its branch offices in
multiple rural locations in the western and far-western hills with its vision to reach the
financially under-privileged population and increase financial literacy therein.

Data Presentation and Analysis

The detailed analysis is made by comparing four commercial banks of Nepal to know the
effect based on various variables. Presentation and analysis of the data is the core of each
and every research work. This study requires some financial and statical tools to
accomplish the objective of the study. Data collection from various sources are processed
and changed into an understandable presentation using financial as well as statistical tools
supported by diagrams and graphs .The main objective of the study are to analyze the
relationship between corporate tax and profitability of commercial banks of Nepal. The
necessary financial facts and figure, as well as descriptive information are gathered
through the financial statement of respective banks (SANIMA, MBL, GBIME,SBL, and
NABIL) from F/Y 2014/14 to F/Y 2022/23.

Return on asset (ROA) of Selected Commercial Banks

ROA is taken as a proxy for profitability. It is an indicator of how profitable a company is
relative to its total assets.
 21

Table 2:Return on assets of selected bank

Year/Banks SANIMA MBL GBIME SBL NABIL Mean SD CV

2017/18 1.85 1.47 1.67 1.59 2.61 1.84 0.45 0.25

2018/19 2.07 1.61 1.82 1.49 2.11 1.82 0.27 0.15

2019/20 1.41 1.02 1.06 1.26 1.58 1.27 0.24 0.19

2020/21 1.44 1.02 1.20 1.25 1.71 1.32 0.26 0.20

2021/22 1.09 0.94 1.38 1.10 1.20 1.14 0.16 0.14

2022/23 1.21 0.87 1.30 1.11 1.42 1.18 0.21 0.18

Mean 1.57 1.27 1.48 1.43 2.06

SD 0.31 0.34 0.25 0.23 0.57

CV 0.20 0.26 0.17 0.16 0.28

Source: Annual report of selected banks and results are drawn using MS – Excel.

Table:1 depicts a return on asset of selected commercial banks. The mean value of ROA
for NABIL seems to be the strongest as it has the highest value among all banks. The mean
value of NABIL (2.06) is greater than that of SANIMA (1.57), GBIME (1.48), SBL (1.43)
and MBL (1.27). The S.D. of SBL (0.23) is very low compared to S.D. of SANIMA (0.31),
MBL (0.34), GBIME (0.42) and NABIL (0.57). It indicates low volatility and low earning
risk in favor of SBL. Since, standard deviation measures absolute risk, coefficient of
variation (CV) has also been calculated to analyze the relative earning risk. Relating to the
study it shows SBL has low ROA risk of 0.16comparing with SANIMA (0.20), MBL
(0.26), GBIME (0.17) and NABIL (0.28). The minimum and maximum ROA value of
SBL is comparatively greater than that of other banks.
Figure:1 further shows the trend of ROA of selected banks over the periods. The analysis
of table 1 is best described in the chart below.
 22

3.5

2.5

2
ROA

1.5 SANIMA
MBL
GBIME
1
SBL
NABIL
0.5

0
2013/ 2014/ 2015/ 2016/ 2017/ 2018/ 2019/ 2020/ 2021/ 2022/
14 15 16 17 18 19 20 21 22 23
YEARS

Figure 1:Trend chart of ROA of selected banks

Analysis of CIT (%) of Selected Commercial Banks

CIT is an independent variable in the study whose effect is analyzed on the
bank’s profitability.

Table 3:Data Analysis of CIT(%)of selected banks

SANIM GBIM NABI

Year/Banks A MBL E SBL L Mean SD CV

2017/18 29.85 30.95 27.84 30.25 29.62 29.70 1.16 0.04

2018/19 30.10 30.08 29.79 31.57 29.84 30.28 0.74 0.02

2019/20 30.13 32.02 30.21 31.48 32.03 31.17 0.94 0.03

2020/21 30.06 29.51 30.21 31.49 27.62 29.78 1.41 0.05

2021/22 29.60
 23

30.50 29.42 31.84 32.31 30.73 1.30 0.04

2022/23 30.40 30.39 27.75 30.63 30.99 30.03 1.30 0.04

Mean 29.08 29.26 29.21 29.47 29.32

SD 1.37 2.15 4.12 2.35 2.07

CV 0.05 0.07 0.14 0.08 0.07

Source: Annual report Source of selected banks

Table:2 depicts corporate income taxation of selected commercial banks. The mean value
of CIT for SBL Bank seems the strongest than other banks with the mean value of 29.47 in
comparison with the mean value of MBL (29.26), GBIME (29.21), SANIMA (29.08) and
NABIL (29.32). The standard deviation of SANIMA (1.37) is lowest among all banks
followed by MBL (2.15), GBIME (4.12) SBL (2.35) and NABIL (2.07) which show low
risk toward contribution to CIT. Similarly, the Coefficient of Variation of SANIMA (0.05)
is very low comparing to SBL (0.08), MBL (0.07), GBIME (0.14) and NABIL (0.07). It
indicates that the relative risk of CIT is greater in GBIME than other banks.
 24

45

40

35

30

25
CIT (%)

20 SANIMA
MBL
15 GBIME
SBL
NABIL
10

0
4 5 6 7 8 9 0 1 2 3
3 /1 4 /1 5 /1 6 /1 7 /1 8 /1 9 /2 0 /2 1 /2 2 /2
2 01 2 01 2 01 2 01 2 01 2 01 2 01 2 02 2 02 2 02

YEARS

Figure 2:Trend chart of CIT(%) of selected banks

 25

Bank Size of Selected Commercial Banks

Table 4:Ln(TA) of selected banks

GBIM
Year/Bank SBL NABIL Mean SD
SANIMA MBL E CV

0.0
2016/17 24.96 24.96 25.48 25.22 25.69 25.26 0.32 1

0.0
2016/17 24.96 24.96 25.48 25.22 25.69 25.26 0.32 1

0.0
2017/18 25.24 25.16 25.56 25.51 25.80 25.45 0.26 1

0.0
2018/19 25.42 25.38 25.77 25.74 26.03 25.67 0.27 1

0.0
2019/20 25.56 25.55 26.34 25.86 26.19 25.90 0.36 1

0.0
2020/21 25.80 25.79 26.57 26.15 26.40 26.14 0.35 1

0.0
2021/22 25.98 25.91 26.61 26.30 26.76 26.31 0.37 1

0.0
2022/23 26.10 25.95 26.99 26.38 26.90 26.46 0.47 2

Mean 25.23 25.26 25.83 25.53 26.00

SD 0.67 0.55 0.76 0.68 0.56

CV 0.03 0.02 0.03 0.03 0.02

Source: Annual report of selected banks and results are drawn using MS – Excel.

Table:4indicates that the mean value for Bank Size of NABIL (26) is the highest among all
banks followed by SBL (25.53), MBL (25.26) SANIMA (25.23) and GBIME (25.83).
However, S.D. of MBL (0.55) is the lowest one comparing to SANIMA (0.67),
GBIME(0.76) SBL(0.68) and NABIL (0.56)
 26

27.5
27
26.5
26
25.5
25
Ln (TA)

SANIMA
24.5
MBL
24 GBIME
23.5 SBL
23 NABIL
22.5
2013/ 2014/ 2015/ 2016/ 2017/ 2018/ 2019/ 2020/ 2021/ 2022/
14 15 16 17 18 19 20 21 22 23
YEARS

Figure 3:Trend chart of Bank size [Ln(TA)]of selected banks

Analysis of CDR (%) of Selected Commercial Banks

Table 5:CDR(%) of selected banks

Year/Banks SANIMA MBL GBIME SBL NABIL Mean SD CV

2016/17
89.03 88.47 79.30 88.40 65.38 82.12 10.19 0.12
2017/18
87.43 89.78 84.70 86.08 82.66 86.13 2.70 0.03
2018/19
90.42 87.00 91.62 89.65 81.96 88.13 3.84 0.04
2019/20
85.10 88.56 88.25 89.04 79.72 86.13 3.91 0.05
2020/21
94.10 86.53 85.59 90.60 89.84 89.33 3.41 0.04
2021/22
89.18 86.32 94.99 96.08 92.49 91.81 4.06 0.04
2022/23
83.80 81.35 85.21 84.94 84.19 83.90 1.53 0.02
Mean
87.40 85.09 85.69 87.39 78.57
SD
3.51 3.91 4.77 4.61 9.65
CV
0.04 0.05 0.06 0.05 0.12
Source: Annual report of selected banks and results are drawn using Excel.
 27

Table:4 represents the CDR position of selected banks. The mean value of SANIMA
(87.40) is the highest than MBL (85.09), GBIME (85.69), SBL (87.39) and NABIL (78.57)
which shows the CDR of SANIMA is strong. However, S.D. of SANIMA (3.51) is lowest
over past 10 years than SBL (4.61), MBL (3.91), GBIME (4.77) and NABIL (9.65) which
indicates low volatility and low risk of SANIMA regarding CDR. Likewise, C.V. of
SANIMA (0.04) is comparatively less than MBL (0.05), SBL (0.05), GBIME (0.06) and
NABIL (0.12). This shows a low relative risk of SANIMA towards CDR

120

100

80

60
CDR (%)

SANIMA
MBL
40 GBIME
SBL
NABIL
20

0
2013/ 2014/ 2015/ 2016/ 2017/ 2018/ 2019/ 2020/ 2021/ 2022/
14 15 16 17 18 19 20 21 22 23
YEARS

Figure 4:Trend chart of CDR(%)of selected banks

 28

Analysis of CRR (%) of Selected Commercial Banks

Table 6:CRR(%)of selected bank

Year/ SANIM NABI

MBL GBIME SBL Mean SD CV
Bank A L

0.5
2017/18 24.72 25.26 25.34 6.37 10.05 18.35 9.35 1

0.6
2018/19 22.87 23.70 22.13 4.56 4.78 15.61 10.00 4

0.5
2019/20 24.01 23.83 24.50 5.03 11.20 17.71 9.03 1

0.7
2020/21 22.85 27.08 29.89 3.54 3.66 17.40 12.85 4

0.7
2021/22 27.07 21.40 23.55 3.23 4.13 15.88 11.32 1

0.6
2022/23 30.01 29.43 30.34 4.06 6.89 20.15 13.43 7

Mean 25.09 25.54 28.57 6.73 8.30

SD 2.39 2.30 4.41 4.15 3.55

CV 0.10 0.09 0.15 0.62 0.43

Source: Annual report of selected banks and results are drawn using MS – Excel.

Table:5 depicts the credit reserve ratio of banks. The mean value for CRR of GBIME
(28.57) is the strongest irrespective of MBL (25.54), SANIMA (25.09), SBL (6.73) and
NABIL (8.30). Then, S.D. for CRR measuring risk is lower of MBL (2.30) than SBL
(4.15), SANIMA (2.39), GBIME (4.41) and NABIL (3.55). The C.V of MBL (0.09) is
lowest followed by SANIMA (0.10), GBIME (0.15), SBL (0.62) and NABIL (0.43). That
indicates MBL has low relative risk regarding CRR.
 29

40

35

30

25

20 SANIMA
CRR (%)

MBL
15 GBIME
10 SBL
NABIL
5

0
2013/ 2014/ 2015/ 2016/ 2017/ 2018/ 2019/ 2020/ 2021/ 2022/
14 15 16 17 18 19 20 21 22 23
YEARS

Figure 5:The trend of CCR(%)of selected banks

Descriptive Statistics of study variables

Table:6 displays the aggregate descriptive analysis of selected four banks of the past eleven
years. The report shows Return on Asset (ROA) is the proxy of profitability which shows
the financial performance of the banks. The other independent variables are the Corporate
Income Tax (CIT), Bank Size, Credit Deposit Ratio (CDR) and Credit Reserve Ratio
(CRR).

Table 7:Data and Descriptive Statistics of study variable(n=50)

Variables Mean Standard Sample Range Minimum Maximum

Deviation Variance

ROA (%) 1.5612 0.4394 0.1931 2.02 0.87 2.89

CIT 29.2656 2.4777 6.1389 15.32 23.21 38.53
Ln (TA) 25.5696 0.6936 0.481 2.89 24.10 26.99
CDR (%) 84.8282 6.4093 41.0794 31.65 64.43 96.08
CRR (%) 18.8444 10.0056 100.1118 31.91 3.23 35.14

Source: Annual report of selected banks and results .

The result shows that the average value of the bank performance (ROA %) is 1.5612
during the period of 2013-2023, that means on the average return of sample commercial
 30

banks in Nepal earns 1.5612. The standard deviation of ROA is 0.4394 which referred to
substantial variation. The lowest ROA faced by banks on average is 0.87 and the highest
one is 2.89.

CIT (%) is an independent variable with average mean and standard deviation of 29.2656
and 2.4777 respectively. During the past ten years, the CIT of selected banks varies from
23.21 percent to 38.53 percent.

The bank size sample from the selected banks in Nepal varies from 24.10 to 26.99 percent
with the mean and standard deviation 25.5696percent and 0.6936 percent respectively
indicates the volatility in the results.

Table:7 Displays the minimum observation of CDR (%) is 64.43 and the maximum
observation is 96.08. The mean value and standard deviation regarding CDR of Selected
banks of Nepal are 84.8282 and 6.4093 respectively.

Nepal Rastra Bank (NRB) has revised the cash reserve ratio (CRR) for commercial banks
from 6 percent to 4 percent. However, the table shows the minimum observation of cash
reserve ratio is 3.23% which is slightly lower than regulatory requirement of 6% and the
maximum observation is 35.14% which can be taken as non-compliance of banks
regarding Nepal Rastra Bank’s Unified Directives. According to table 2.6, the mean and
standard deviation of CRR is 18.8444 and
10.0056respectively.

Relationship between Profitability and Corporate tax Indicators

Correlation indicates the relationship between the variables. In an effort to analyze the
nature of the correlation between dependent and independent variables, the Pearson
correlation analysis has been computed.
 31

Table 8:Pearson Correlation matrix of study variables(n=50)

ROA CIT CRR Ln (TA) CDR

ROA(%) 1
CIT -0.26713 1
CRR(%) -0.23997 -0.12769 1
Ln (TA) -0.2345 0.411528 -0.29182 1
CDR(%) -0.49766 0.283438 0.004675 0.263308 1
Source: Annual report of selected banks and results are drawn using MS – Excel.

Table:7 depicts the Pearson Correlation matrix of the study. The study indicates that there
is a negative correlation between Corporate Income Tax with profitability (ROA) but the
magnitude of association is not very strong with the correlation coefficient of -0.26713.
CRR also exhibits a negative correlation with profitability (ROA), though the association
is weaker compared to CIT, with a correlation coefficient of -0.23997. This suggests that
higher CRR may have a slight adverse impact on bank profitability. Bank size also shows a
negative correlation with profitability (ROA), but with a relatively low magnitude, as
indicated by a correlation coefficient of -0.2345. CDR demonstrates a strong negative
correlation with profitability (ROA), with a correlation coefficient of -0.49766. This
suggests that higher CDRs are associated with lower profitability for Nepalese commercial
Bank. The study also indicates that there is a positive correlation between CIT and CDR,
indicating that as CIT increases, the CDR tends to increase as well, with a correlation
coefficient of 0.283438. CRR and bank size show a weak positive correlation, suggesting a
slight tendency for CRR to increase with bank size, with correlation of 0.411528. There is
a very weak positive correlation between CRR and CDR, implying a slight tendency for
CRR to increase with CDR, with correlation coefficient of 0.004675. Overall, while CIT
and CRR exhibit negative correlation with bank profitability, CDR demonstrates a stronger
negative association, suggesting it greater influence on the profitability of Nepalese
commercial banks.
 32

Effect of Corporate Income Tax on Commercial Banks

For analyzing the effect of corporate income tax on the profitability of commercial banks
of Nepal, regression analysis has been computed. Regression analysis is analysis using
specified and associated data for two or more variables such that one variable can be
estimated from the other variable.

Table 9:Regression Analysis of corporate income tax on the profitability

Variables Coefficients Standard Error t Stat P-value

Intercept 7.503651 2.04167 -3.06837 0.003904
CIT -0.02123 0.006864 0.302173 0.764126
LnTA -0.01321 0.006035 2.364945 0.023103
CDR (%) -0.10296 0.072267 3.213169 0.002634
CRR (%) -0.02876 0.01396 1.322867 0.195584

R2= Adj. R2= 0.293356 F-Stat= F-Sig=

0.351041 6.085456 0.00053

Source: Annual report of selected banks and results are drawn using MS – Excel 2007.

Table:8 presents the regression results showing the link between profitability and other
independent variables. The value derived from the regression model for R 2 is 0.351041 and
adjusted R2 is 0.293356. The overall explanatory power of the regression model is fair with
R2 of 0.351041. This indicates that 35.1041% of the variation in bank performance can be
explained by the variation in the explanatory variables. The F-statistics of 6.085456 is
statistically significant with a p-value of 0.00053, indicating that the regression model as a
whole significant in explaining bank profitability.

Table:8 displays that the coefficient of CIT is not statistically significant. The finding of
this study supports the hypothesis that CIT has no significant effect on bank performance.
The coefficient for CIT is -0.02123, indicating but it is not statistically significant with a p-
value of 0.764126. This suggests that changes in corporate income tax do not have a
significant impact on bank profitability.
 33

The coefficient for bank size [Ln(TA)] is -0.01321, indicating that as bank size increases,
profitability tends to decrease. This relationship is statistically significant with a p-value of
0.023103.

Credit Deposit Ratio in the regression model has a negative coefficient and is statistically
significant. That basically indicates that there is a negative relationship between the bank's
profit and CDR ratio.

Credit Reserve Ratio possess negative coefficient and is not statistically significant. The
model shows both the bank's profit and CRR ratio are directly proportionate to each other
which mean higher the profit, higher the CRR ratio and vice-versa.

Findings and Discussion

This study is carried out to identify the effects of corporate income tax on bank
performance in Nepalese context. The data of both independent and dependent variables
over ten years are obtained from selected bank’s annual reports and they are used in this
study using Excel Spreadsheet Software. Major findings while analyzing the data are
pointed out be

• The higher mean for ROA among selected five banks is of NABIL with the value of 2.06
percent.
• For CIT the mean value of SBL is the strongest than that of SANIMA, MBL, GBIME, and
NABI. It has a mean of 29.47 percent. Again GBIME and SANIMA has the highest
average value for CRR and CDR of 28.57 percent and 87.40 percent respectively. None of
the banks has kept an average CRR as per the NRB directives that are SANIMA (25.09),
MBL (25.54) SBL (6.73) and NABIL (8.30).
• NABIL has the strongest average of 26.00 percent among all four banks for the bank size
[Ln(TA)].
• The Pearson Correlation of the coefficient indicates that the bank's profitability (ROA) is
negatively correlated with the Corporate Income Tax (CIT) with a correlation value of -
0.26713. ROA is also negatively correlated with other controlling independent variables
i.e. Bank size [Ln(TA)], Credit Deposit Ratio (CDR) and Credit Reserve Ratio (CRR) with
a correlation value of -0.2345, -0.49766 and -0.23997 respectively.
 34

• The regression model revealed the Corporate Income Tax (CIT) has a negative and not
statistically significant impact on the profitability (ROA) of the banks.

CHAPTER III: CONCLUSION AND ACTION IMPLICATION

Summary
The present study is an attempt to explore the relationship between the capital adequacy
and profitability of commercial banks. Corporate income tax is an important parameter for
judging the strength and soundness of the banking system. The data of four commercial
banks with 50 observation for the period of F/Y 2016/17 to 2022/23 has been used for the
analysis. The affordable tax imposition will encourage the banks for regular tax payment
and can increase the profitability level.

Banks must contribute to the tax. However, the tax rate should not be high which affect a
bank's profitability negatively. When the tax rate imposition is high there is a high chance
of bank to avoid and escape tax payment. The study shows higher the Profits, higher the
tax payment.

The sole purpose of the study was to see the trend of the CIT contribution of banks and to
fulfill the purpose of the study different means were used to come up to the objective of the
study. For obtaining the necessary results, the study has been done using descriptive
research design. The panel data of commercial banks have been collected from the annual
reports of the banks in the sample.

The study also revealed that CIT has negative coefficient which means it has a negative
relationship with profitability of banks and also revealed that it is not statistically
significant.

Conclusion and Action implication

As the bank has become one of the most important service sectors that prevails in any
business environment, it has more responsibilities towards society. The global market is
growing day by day and more challenges arise per day. It is sure that future competition
won't be easy as the completion grows hard than today. The new competitive banking
industry with quality and speedy services will to able to attain objectives including profit
generation along with maintaining social responsibility.
 35

A clear financial picture of commercial banks can be reviewed from all the above
presentation. Now, some valuable and timely suggestions and recommendation can be
advanced to overcome weakness, inefficiency and to improve the present financial position
of the bank. On the basis of findings mentioned above some of the recommendations have
been drawn as follows:

• As the part of commercial bank in private sector, SANIMA, MBL, GBIME, SBL and
NABIL cannot keep its eye off from the profit motive, so it should be always careful in
increasing profit in a real sense to maintain the confidence of shareholders, depositors’ and
its customers.
• The banks should take care of variables that affect the tax imposition and the overall
profitability.
• The study could be more interesting to include more indicators to test the relationship.
Meanwhile, it can help researchers to enhance the accuracy of the research model with the
most suitable variables.
• The banks should not take tax imposition as a disadvantage but as the advantage to
upgrade the reputation of the bank itself.
• It should reduce its expenses so that it can be able to pay taxes on time.
• Although commercial banks are found to be profit-oriented, they should not forget social
responsibilities. So, they should try to establish their branches in rural place to retain new
customers as well.
 36

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APPENDIX
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