The UK government has been embroiled in the row since it announced in March plans to close a loophole which allows bakeries in Britain to serve hot takeaway food without incurring 20 percent value-added tax.
The items include pies, sausage rolls and pasties -- a traditional delicacy reputedly invented by miners in the southwestern English county of Cornwall -- which consists of meat and vegetables in a pastry crust.
But the government has now amended the definition of what constitutes a "hot" pasty, allowing it to perform the U-turn, the BBC reported.
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Under the revised plans, food which is cooling down rather than being kept warm in a heated display cabinet will not be liable for VAT.
Treasury minister David Gauke told the BBC that "after extensive engagement", the department had "improved the policy, addressing practical concerns, ensuring that the new regime could be as simple as possible to apply."
The issue has been an embarrassing sideshow for Prime Minister David Cameron, who has fended off suggestions that the tax highlights his lack of "common touch".
He earlier said it was unfair that takeaway restaurants such as fish and chip shops had to charge VAT on hot food, when bakeries and supermarkets did not.
"I am a pasty-eater myself. I go to Cornwall on holiday, I love a hot pasty," said Cameron, who was educated at the elite Eton College and then at Oxford University.
Labour's Chris Leslie, the shadow Treasury minister, said the U-turn proved the government "can't think through policies before it makes announcements.
"It really ought to have got some of these consultations done before the chancellor decided to put up the taxes," he added.
