The Chancellor wrote to Andrew Tyrie, the chairman of the Treasury Select Committee, to confirm the climb down and alter the definition of a "hot" pasty.
This will allow the VAT reversal on food that is “cooling down”, such as pasties and sausage rolls, after being removed from the oven.
Had the original measure gone ahead, it would have added 50p to a £2.50 savoury food item and raised £110m for the Treasury.
The government also announced that a 20% VAT charge due to be levied on static caravans will now drop to 5% from April next year.
Labour was quick to condemn the way the government dealt with the planned VAT rises, with shadow chief secretary to the Treasury, Rachel Reeves, describing the policy U-turn as a "a total and utter shambles".
The government said it had improved the policies after engaging with concerns, altering the definition of what is a "hot" pasty, and said it showed it was listening.
Many AccountingWEB members pointed out that the proposals were too complex as it would be hard to define “ambient temperature”.
Bakery chain Greggs also mounted a campaign after £30m was wiped off its market capitalisation following the announcement.
At the time Greggs said the move would have a "disproportionate impact on the specialist bakery sector, resulting in further unemployment, high street closures and reduced investment".
Shares in the company rose 8% in early trading on Tuesday on the news of the U-turn.
George Bull, senior tax partner at Baker Tilly said: “We welcome common sense prevailing on the headline-grabbing pasty and caravan taxes.
“However, this could mean that the UK faces a further VAT increase later this year. With income tax and National Insurance, VAT is one of the “Big Three” revenue-raisers for the UK Exchequer. With no upper limit on the standard rate of VAT, the autumn Budget may announce an increase to the current rate of 20%, as recommended by the IMF.”
In his blog Richard Murphy put the news into perspective: “It’s a good question whether or not he should have done; the pasty tax was a fix for an anomaly exploited by bigger businesses alone whilst the caravan tax was a charge on holiday accommodation. Should it have been VAT free? Neither question is in the big scheme of things that important except for what they represented.”