Even though the hole is exposed outwards, why would you say "hole in it" instead of "hole on it"?

Native speaker’s answer
Rebecca
You would say "hole in it" since the hole goes through it. While the "hole" can be located "outside" the bag, it can also be located "inside" the bag. Whereas, if you use "hole on it" it would mean that the hole is placed on top of the bag, which is not quite right. You use "on" if you place something on top of a surface, like a poster "on" a wall. Ex: There was a hole in the wall that went through to the room next to it. I wonder who did that? Ex: Oh no! I found a hole in my favourite shirt! Ex: I went outside to the garden. There was a hole in the ground to plant the new flowers. => The hole is located "inside" the soil.