A much-publicised law designed to stop wealthy tax exiles bankrolling political parties has been quietly dropped until after a general election, the Observer has learned.

The disclosure means that key Labour donors such as Lakshmi Mittal as well as Tory donor Lord Ashcroft will still be able to pump millions of pounds into the forthcoming election campaign, despite promises to curb the influence of wealthy backers. It has prompted accusations that the government has "nobbled" an act of parliament by failing to ask the electoral commission to enforce the rule.

Lord Oakeshott, the Liberal Democrat treasury spokesman, said he suspected Labour had abandoned its principled stand of just a few weeks ago because of concerns that the party cannot fight a cut-price general election against cash-rich Tories. "To support an important piece of legislation stopping this underhand practice and not bring it in before a general election is like banning a drug-taking footballer but allowing him to play in the cup final," he said.

"I suspect the electoral commission is not being pushed by the government to get on with it. Labour needs to realise that they will never win an arms race with the Tories on dodgy donations."

The Political Parties and Elections Act was given royal assent two weeks ago. It included an amendment which was supposed to limit donations from individuals who are domiciled abroad for tax purposes – so called "non-doms" – to no more than £7,500 a year.

It was finally voted through after months of behind-the-scenes battles between Labour backbenchers, who wished to curtail the power of donors, and ministers who were minded that their party receives significant support from "non-doms" such as Gordon Brown's confidante Lord Paul, and the packaged food tycoon Sir Gulam Noon. Last month Jack Straw, the justice secretary, accepted the amendment amid a flurry of press releases and briefings , claiming that only those who pay all their income tax in Britain will be able to give significant funds to political parties.

But the electoral commission, the political watchdog charged with implementing the law, told the Observer this weekend that the law is not expected to be enforced until the summer of 2010 – weeks after the expected date of the next general election. A commission spokesman said that officials are waiting for Straw to lay an order before parliament before the law can be implemented. "In the meantime, the rules will stay as before and someone who is non-domiciled abroad can still donate," he said.

The failure to enact the law has angered Labour MPs who backed the amendment. Sir Peter Soulsby, the Labour MP for Leicester South, said: "This really is extraordinary. Everyone who voted for this could not have been more clear. We were expecting it to be implemented quickly, certainly in time for the general election."

Lord Campbell-Savours, the Labour peer who first drew up the amendment, said that it should be enacted as soon as possible. "If the electoral commission continues to advise those who are impermissible donors under my amendment that they are still free to donate, it should be considered a breach of the spirit of undertakings given to me at the time. This needs clarification," he said.

The treasury says there are about 116,000 residents with non-domiciled status. Mittal has given more than £1m to Labour while other wealthy non-doms have donated more than £3m since the last general election.

Lord Ashcroft, the Tory deputy chairman, has directed millions of pounds to help his party target marginal seats in recent years and was granted a peerage in 2000 after agreeing to become resident in Britain for tax purposes. He refuses to discuss his tax status. Lord Laidlaw, one of the Tory party's biggest backers, lives in Switzerland and has been described as a tax exile.

The Liberal Democrats have also received funds from donors domiciled abroad. Bhanu and Dhruv Choudhrie, businessmen who originate from India, have given more than £475,000 through their companies. Bhanu's father Sudhir Choudhrie is also domiciled abroad and has given the party £95,000.

A spokesman for the Justice Ministry confirmed that curbs on "non-doms" will not be implemented until after the general election but said that the delay was because the act was difficult to enact. He declined to comment on claims from ministry officials that the law would be launched earlier.