Here's my basic understanding of this setting (and I use it as well). I have 4 VLANs on my home network.
Let's say your main LAN is on 192.168.1.0/24, including your Pihole device.
Pihole by default will only answer requests that are made from machines in that subnet (192.168.1.1 - 192.168.1.254). Everything else is ignored.
You have another VLAN on 192.168.99.0/24, addresses for devices are 192.168.99.1 - 192.168.99.254. If they make a DNS request to Pihole, it's ignored by default.
But since it's a VLAN, it (and any other VLAN you create this way) is still using the same network connection (cable, interface, etc.) to communicate with your gateway/router. Let's say this interface name on the Pihole device is eth0.
When you change the setting you've mentioned above, you're telling Pihole to answer any DNS request that comes over that physical interface (eth0) regardless of which virtual network address makes the request.
The above explanation derives from my experience on a Unifi UDM-Pro router/gateway.