Giving evidence to the Home Affairs Committee, he said the UK should follow countries like Switzerland and Portugal, where lenient drug laws have “cut heroin use, HIV and violence”.
The tycoon, who sits on the Global Commission on Drugs Policy, added that current policies aren’t working and that drugs should be regulated, not criminalised.
Branson said the war on drugs had failed because the government was “trying to deal with it as a criminal problem rather than a health problem”.
Sentencing guidelines made today said that offenders with a “limited” role in gangs could face community orders for intent to supply Class A drugs.
Another change would reduce the sentences of drug runners, meaning that a dealer with £17,000 worth of cannabis could be spared jail.
The legal advice given at the committee hearing are set to come into force on February 27.
The Sentencing Council said offenders who import or export drugs for profit on a large scale would still face tough sentences.
In Portugal, which Branson said had a “massive drugs problem” where “heroin was rampant”, no one has been jailed for using drugs in the last 10 years.
He said: “100,000 young people are arrested every year, and the figures are growing, for taking drugs. 75,000 of these young people are given criminal records.
“By actually moving drugs into the health department and not in the Home Office, if people have a problem, just like in Portugal, they should go in front of a panel to help them.”
The Home Office has previously said it has “no intention of liberalising our drug laws”.
Professor David Nutt, former government drugs adviser who was sacked in 2009, said: “The drug laws are not based on any kind of sense or evidence so any sentencing for drugs is questionable.
“What we should be doing is properly revising the drug laws so that the sentencing is proportional to the harm of drugs.”