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"But the sharingan sees right through that"
Lol, no.
This technique exerts a hallucinatory effect upon the eyesight, effectively blinding the opponent. No matter how skilled an opponent may be, they are forced to wait helpless in this world of darkness, as this technique allows the user to attack unseen. Although it negates sight, it does not stop the other senses.
It affects the optic nerve, not the brain. Notice how it affected even the Kage Bushin - which Itachi himself stated were immune to genjutsu.
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Therefore, you can't see through it via Sharingan, you can't disperse it via the Kai method; the only way to deal with this is to be a sensor like Madara, or have amazing senses like Hiruzen.
Wouldn't be much of a fight.