It seems that toolset.xml goes only half way. Ideally it should be able to do away with the ToolInit call in initialize() in __init__.py. But I could not get the tool icon to show in the ZMI without the ToolInit call.
The ToolInit call in the initialize function registers the tool class as something that can be added to OFS based folders in the database - primarily it register a factory for creating instances of the class. This is basically the same that ContentInit does for normal content classes.
Once the class is registered and its meta_type is known, instances of the class can be added to OFS based Folders. GenericSetup steps are responsible for managing persistent content and can be used to add tool instances to the database.
If we wanted to avoid the code in the initialize function, we would need to create some custom ZCML directives instead and use these in a configure.zcml to register the type and its factory. Dexterity has gone this route, but its not available for Archetypes based content types or general classes like tools.