The attack happened in September 2013 in Bishopsworth when the five drunken women wanted a free cab ride home to Swindon as they did not have enough money.
But when asked to leave the cab they refused and attacked the Sikh driver, racially abusing him before ripping off his turban and burning it.
A woman was cautioned by police at the time of the incident, but not charged until months later, after a campaign. The other four women who were involved in the attack were never prosecuted or even cautioned.
The apology came after an eight-month campaign by the Sikh community in Bristol and later by the charity Sari, the BBC reported.
The victim, who does not wish to be identified, has called for assurances that police take hate crime seriously.
"This attack has affected the whole of my family, the children are very, very scared, my wife is afraid to let me go out of the house, thinking that I am going to be attacked again," he said.
Interim director of Sari, Alex Raikes, said: "They [the police] didn't appreciate that it is like an attack on a person, for a Sikh it is very similar to a serious sexual offence, it's horrendous, it's a massive impact."
Chief Superintend Jon Reilly, Area Commander for Bristol, said: "The officer made a judgement call that a caution was the appropriate disposal which is a form of sanction, but actually that judgement was wrong and it should have been put before court."
"The inspector has now met with members of the community to explain what happened. We are only planning to meet with members of SARI this week to further discuss incidents against taxi drivers," Reilly was quoted as saying by Bristol Post.
The defendant pleaded guilty to a public order offence on November 21 at Bristol Magistrates' Court.
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