A soldier/airman/sailor/Marine's religious preference has, and is, a vital part of many of their lives, especially when it comes to the possibility of being killed or horrifically maimed. Particularly this comes into play if a serviceman or woman has been wounded/killed and needs/desires a chaplain to perform a religious rite (such as last rites), and they are unable to tell whoever is available what that preference is. For non-religious or non-spiritual people, this may not mean much, but for religious or spiritual people, it matters a great deal to have a person who understands your faith be there for you. To think of it in a different way, they also have red medical ones that list things like "allergic to penicillin." If you were wounded and unconscious, you could not tell the medics/corpsmen you had a major allergy, so your tag does. The basic dog tag provides information that would be needed in case of death or a severe wound in which the person was unable to identify themselves or their needs. Name, serial number/social security number, blood type, and religious preference.

In WWII, there used to only be three options: P for Protestant, C for Catholic, and H for Hebrew. Currently, there's really nothing that can't be included. Pastafarian, Jedi, No Preference, Atheist, Agnostic, Baptist, Mormon, Unitarian, etc. If you want it on there, you're only really limited by space.

Here is a good short article describing the reasoning behind why its important for religion to be included.