What are the differences in packet processing between a VT interface and an LSI interface (vrf-table-label or no-tunnel-services)?
The LSI interface provides better packet processing performance than the VT interface, unless there are core-facing interface restrictions or loss of ingress forwarding functionality, because the frame is sent only once through the route lookup.
In a VT interface, the packet loops back, with a first pass as mpls-vrf and a second pass for frame processing. The VT interface is limited by an overall tunnel bandwidth of 1/10 Gbps. The LSI interface is limited by line rate.
For more information, click Layer 2 VPNs and VPLS Feature Guide.