We study the impact of consumption tax reform on firm capital and productivity by examining India’s replacement of the pre-existing sales tax with a value-added tax (VAT) structure. This policy allowed firms to offset their tax liability with VAT paid on capital inputs, effectively reducing the tax-related cost of capital. We analyze whether firms responded by increasing their capital investments. Exploiting the staggered adoption of tax reform across major Indian states, we show that adoption of a VAT system increased firm capital by around three percent. Effects are driven by the most financially-constrained firms – an important source of heterogeneity in a developing country context. We also document a corresponding improvement in the productivity of financially-constrained firms. Our findings thus suggest that beyond revenue generation, consumption tax reforms can have the additional effect of stimulating investment and productivity in resource-constrained environments.