Usually VASP calculates only the spherical contribution to the gradient corrections inside the PAW spheres (non-sperical contributions for the LDA part of the potential and the Hartree potential are always included).
Using LASPH = .TRUE., VASP also includes non-spherical contributions from the gradient corrections inside the PAW spheres. For VASP.4.6, these contributions are only included in the total energy, after self-consistency has been reached disregarding the aspherical contributions in the gradient corrections.
For VASP.5.X the aspherical contributions are properly accounted for in the Kohn-Sham potential as well. This is essential for accurate total energies and band structure calculations for f-elements (e.g. ceria), all 3d-elements (transition metal oxides), and magnetic atoms in the 2nd row (B-F atom), in particular if LDA+U or hybrid functionals or meta-GGAs are used, since these functionals often result in aspherical charge densities.