The Treasury is to give the money to charity in lieu of the tax taken from sales of Wherever You Are, which is on course to be the Christmas number one this weekend.
Choir member Sarah Wall said it was a "brilliant" gesture.
Chancellor George Osborne confirmed the tax would be waived today after a request from Conservative MP Oliver Colvile called for the tax to be waived.
The single - which will raise money for forces' charities - is a soaring success, and chalked up the biggest two-day sale for six years, according to figures released yesterday.
It is outselling nearest rival Cannonball by X Factor winners by a margin of six to one.
The Military Wives were formed by Gareth Malone for BBC2 programme The Choir, which climaxed with the group performing at the Festival of Remembrance at the Royal Albert Hall.
Their single sold 242,000 copies in just two days and could hit the half-million mark by the end of the week.
Mr Osborne said today: "Our armed forces demonstrate incredible commitment to the nation and make sacrifices for all of us.
"The Military Wives choir is doing a great job of raising money for this hugely worthy cause. We will donate the tax collected on the single so that as much as possible of the money spent by the public on this fantastic song goes to charities helping our armed forces and their families this Christmas."
Last month the Government agreed to a similar gesture for The X Factor's charity single Wishing on a Star.
Proceeds from the single are being donated to the Royal British Legion and the Soldiers, Sailors, Airmen and Families Association.
Mrs Wall, 32, whose husband, Corporal Mark Wall, is a military policeman, said any tax move by the Government was welcome.
"I know when Gareth went to Downing Street he asked about it," the mother-of-two said.
"I'm glad they are behind us and they want to help us raise money and everything. It is brilliant that they are doing that."
Mrs Wall was speaking as she and fellow choir members went to their workplace at Tyspane Care Centre in Braunton, north Devon - where some of them will be working when they find if their single is the Christmas number one.
The announcement will be made during the Christmas Day edition of BBC1's Top Of The Pops.