I found a solution! Hope it helps others.
First thing was to find out what the real problem is. I would think that the problem is likely that I ended up having repositories (somehow changed them in between updates to QGIS) which leads me to have GRASS 7 installed with a QGIS version trying to use a qgis-grass-plugin for GRASS 6... See the question and updates in above.
Solution, find the correct repositories and update as necessary until you have a consistent set of versions. That is, GRASS 7 and qgis-grass-plugin for verion 7... and make all of the packages have the same version!
I started with these repositories: # deb http://qgis.org/debian trusty main
and # deb-src http://qgis.org/debian trusty main.
First comment those two out (or the ones you have).
And then add those highlighted in the picture... you can find those in the QGIS installation pages.
Then update the list using for example Synaptic or via the terminal. You can see in the left side of the picture that I have already updated the list but still have the libqgisgrass6-xx packages active and the libqgisgrass7-2.14.3 waiting for installation.
After installing the libraries referencing GRASS 6 and installing the one for version 7 you would probably there... here is the situation now (but see below for an additional possible complication)
I still had the problem that the grass-core package was still 7.03 while the rest of grass packages were 7.04... upgrade that too or you will not have the grass-plugin available yet.
In this picture you can see that I have already upgraded grass-core to 7.04 and now I can finally use the GRASS 7 plugin in QGIS 2.14.3!
Comments? experiences?
It looks like you are working with an older version of the processing plugin.
Take a look into C:\users\<username>\.qgis2\python\plugins
and delete any folder named processing.
The current core version does not need the msys folder for GRASS 7 commands, only GRASS (which is GRASS 6.4.3) still needs it.
r.watershed
is included in GRASS and GRASS7, so I suggest to deactivate GRASS to avoid the MSYS folder problem. The standalone QGIS 2.16.1 version does not include GRASS 6 anymore, only 7.0.4. The Grass folder
you specified would not be correct anyway, it should point to the subfolder grass-6.4.3 (if that is installed).
The R folder
has nothing to do with GRASS, but with scripts for R. Since you don't want to use that, you might deactivate the R data provider in the Processing options as well.
Best Answer
The GRASS plugin is available when you open QGIS Desktop with GRASS instead of QGIS Desktop.From the plugin then you can access GRASS.