Honestly it is one of the most inconsistent things in the whole Avatar universe, who can and cannot see spirits and the idea that if you have been to the spirit world you can see them.
This episode as the first spirit world episode just confuses everything. Because Fang here is a spirit shown in the style of the spirit of a physical being separated from it’s body in the physical world, but Fang is dead and we assume has been in the spirit world for a while so it should just be a spirit at this stage and be seen like Hei Bai. Aang as a spirit also very confusing, because when Jinora uses astral projection people can see her.
Then normal spirits also seem to be able to decide if they can be seen or not, as seen when Jinora can naturally see spirits in Book 2 and has to ask the spirits to show themselves to everyone else.
I guess naturally spiritual people like Iroh and Jinora can just see spirits regardless of form, you can become spiritual enough to see them like Bumi and Avatars seem to be able to see them also.
The problem with this episode is that we never actually go to the spirit world despite the episode name, it is actually the next episode we see it a bit and see Roku and Fang coloured properly as spirits.