SRINAGAR, India—The Jammu and Kashmir and Ladakh High Court ruled this week that trade across the Line of Control (LoC) between Jammu and Kashmir and Pakistan-occupied Kashmir (PoK) constitutes intra-state trade, affirming the region’s legal status as part of India and exempting it from the Goods and Services Tax (GST). The decision, delivered by a division bench of Justices Sanjeev Kumar and Sanjay Parihar, resolves a long-standing dispute over the tax treatment of cross-LoC barter trade, which was suspended in 2019 over security concerns.

The court dismissed writ petitions filed by traders challenging show-cause notices issued by tax authorities under the Central GST Act of 2017. The bench emphasized that PoK "is part of the territories of the state of Jammu and Kashmir," making the trade intra-state rather than interstate. While the ruling clarifies the legal position, it upheld the authority of tax officials to investigate GST liabilities, referring traders to statutory remedies for resolving disputes.

The Legal Dispute and Court’s Reasoning

The case stemmed from petitions filed by traders involved in cross-LoC barter transactions between 2017 and 2019. They contested GST demands, arguing that the trade, conducted under a 2008 framework as a confidence-building measure (CBM) between India and Pakistan, was exempt from taxation. The traders highlighted that the transactions used a barter system, with no monetary exchange, and should be treated as zero-rated sales.

However, the court rejected these arguments, stating that the location of suppliers and the place of supply were within the erstwhile state of Jammu and Kashmir (now a Union Territory). "The cross-LoC trade affected by the petitioners during the relevant tax period was nothing but intra-state trade," the bench observed. It also noted that the petitioners had suppressed material facts, as no specific GST exemption had been granted for cross-LoC trade.

The ruling underscores the legal principle that PoK remains part of India, a stance consistently upheld by New Delhi. Even after the revocation of Article 370 in 2019, the Jammu and Kashmir assembly retains 24 seats reserved for PoK, reinforcing the constitutional view of its integral status.

Historical Context of Cross-LoC Trade

Cross-LoC trade began in 2008 as a CBM amid improving India-Pakistan relations. It allowed traders to exchange 21 mutually agreed items, including spices, handicrafts, and agricultural products, along two routes: Salamabad (Uri)–Muzaffarabad and Poonch–Rawalakot. The trade was conducted on a barter basis to avoid currency exchange complications and foster grassroots economic ties.

In April 2019, India suspended the trade, citing evidence that the routes were being "misused to funnel illegal weapons, narcotics, and counterfeit currency." The Home Ministry attributed the misuse to individuals linked to banned terrorist organizations, leading to the termination of both trade and the parallel Karwaan-e-Aman bus service. The suspension highlighted the fragility of CBMs in the face of enduring geopolitical tensions.

Broader Implications for Kashmir and India-Pakistan Relations

The court’s ruling reinforces India’s sovereign claim over PoK, a position central to its foreign policy. By categorizing the trade as intra-state, the decision aligns with New Delhi’s broader efforts to integrate Jammu and Kashmir more closely with the Union of India, particularly after the abrogation of Article 370.

However, the ruling also underscores the economic and human consequences of the long-standing Kashmir conflict. While the intra-state designation exempts trade from GST, the suspension since 2019 has left traders in limbo, disrupting livelihoods and severing historic community ties across the LoC.

On the Pakistani side of the LoC, recent months have witnessed significant unrest. Widespread protests in Pakistan-administered Kashmir over economic grievances, such as inflated electricity bills and wheat prices, have led to violent clashes and political instability. Demonstrators under the Joint Awami Action Committee (JAAC) have demanded self-rule and criticized Islamabad’s heavy-handed control, reflecting a deepening crisis of governance.

Economic and Strategic Costs of Conflict

The Kashmir conflict has exacted a heavy economic toll on both India and Pakistan. A recent four-day military escalation in 2025, for instance, was estimated to have cost the Indian economy up to $88.7 billion in realized losses, including military expenditures, infrastructure damage, and disruptions to tourism and trade.

Pakistan, whose economy is more vulnerable, faces even greater risks. Moody’s Investors Service warned that sustained tensions with India could "weigh on Pakistan’s growth and hamper the government’s ongoing fiscal consolidation," potentially scaring off foreign investment and accelerating capital flight. The formal trade between the two countries, valued at $1.2 billion annually, remains hostage to geopolitical volatility, with both nations periodically suspending economic ties during crises.

Path Ahead: Legal and Diplomatic Dimensions

For now, the High Court’s ruling provides legal clarity but offers no immediate relief to traders, as cross-LoC trade remains suspended. The petitioners must now engage with GST authorities through statutory appeal processes, a outcome that underscores the complexities of applying tax laws in contested regions.

Diplomatically, the decision reaffirms India’s uncompromising stance on Kashmir, potentially complicating future dialogue with Pakistan. With cross-LoC trade and travel halted, and both sides adhering to rigid territorial claims, the prospects for reviving CBMs appear dim. Nevertheless, the court’s ruling leaves the door open for future trade, provided it occurs within India’s legal framework.