In Mill the Index pulse is used to read RPM, not sure but possibly closed loop VFD spindle control may also use it although I am unsure how good that is. If you use G95 (Feed per rev) on mill then you would need the Index for RPM, most use feed per minute on a mill though.
On a lathe the Index pulse is needed for threading as well as for G95, G95 is normally the mode you would use on a lathe.
If using a floating holder to tap, whether mill or lathe then it would still be a good idea to have a RPM readout as it will help with your calculations for the code..
Hood