Today's verdict agrees with the Bombay High Court, which had ruled that the ban on bar dancers violates the constitutional right to earn a living.
The estimated 700 establishments affected by the decision state employ more than 75,000 women who perform Bollywood-style dance routines and get showered with cash in return.
In 2005, the Mumbai Police had banned dance performances in Maharashtra in bars but cleared them for "elite establishments" and hotels that were of three-star standard or higher.
That decision was declared unconstitutional by the Bombay High Court . The verdict was then challenged by the state government which said the performances were vulgar and left women performers vulnerable to trafficking and exploitation and that the bars they performed in corrupted the young and were meeting places for criminals.
The government had claimed that while there were only 345 licensed dance bars, about 2500 unlicensed bars were doing business in the state.
Women activists and lawyers representing dancers were among those who said the government's stand is sexist and prohibits women from earning a living without providing them with any other employment opportunities.