Transparent with Shading

When drawing with Transparent color in normal brush, it works like the eraser tool. That’s fine and useful.

But when drawing with Transparent color in shading brush, it doesn’t work. Even though no other color is selected for shading (it works when selecting Transparent with any other color).

Any idea what the issue is or how to fix it?

Not a bug, rather just a quirk with the shading brush. Select your transparent color and the colors you want to remove with it. The shading brush only works on colors selected in the palette specifically.