Water is important for a lot of reasons. It helps to flush out excess sodium. It helps to keep your kidneys functioning well. It helps to eliminate retained water (it sounds counter productive, I know - drink more water so you won't retain water, but it really does work). Becoming even mildly dehydrated can cause dry itchy skin, dry eyes, etc. YOu become more susceptible to urinary tract infections if you don't pee often enough (some people more than others). Many people who start drinking more water will tell you that their skin has gotten softer/clearer, among other things.
How much is a whole 'nother issue. The whole 8 glasses a day has pretty much been debunked. The thing is how much you need varies from person to person and even from day to day for each person. If you're sweating a lot and working out hard, you're going to need more water than you would if you were sitting at a desk in a cool environment. Or if, like me today, you're in a place where the heat is on and it's really really dry, you might need more water than if it were a more humid spring day.
The guideline I like to use is by the color of my urine. If it's a very pale yellow - nearly straw colored - then I'm ok. If it's darker, then I need to drink more. If it's lighter, I can probably ease up on the water.
Hope that helps!