Dynamic quorum and Dynamic witness in Always On AG 2016
Will it automatically take away 1 vote from either one of the nodes? If yes, remaining vote will be 33% not majority and single point of failure.


Yes correct. Dynamic witness works in such a way that it tires to keep total number of votes odd. In your case when the FS witness is down the Dynamic quorum will toggle one vote from one of the node such that its vote becomes zero and total votes now voting would be one.

The dynamic quorum and witness are very much interrelated. In above case the process of adapting quorum after FS witness failed is actually dynamic quorum. It adjusted itself after the failure.

I would strongly suggest you to read Understanding cluster and pool quorum